Euro, British Pound Give Back As Market Liquidity Thins Ahead of Thanksgiving Holiday

Talking Points
•    Japanese Yen: Jumps to 14-Year High
•    Pound: CBI Retail Sales Survey Rises to Two-Year High
•    Euro: ECB Member Axel Weber Pushes to Normalize Policy
•    US Dollar: Risk Trends to Drive Price Action on Thin Markets

Euro, British Pound Give Back As Market Liquidity Thins Ahead of Thanksgiving Holiday

The Euro halted the three-day advance against the greenback and pulled back from the fresh yearly high (1.5146) to reach a low of 1.5046 on Thursday, and the single-currency may face increased volatility going into the North American trade as liquidity thins ahead of the Thanksgiving holiday. Nevertheless, as the EUR/USD rally remains well supported by the 50-Day SMA at 1.4834, the euro-dollar may continue to retrace the sell-off from the previous year as the European Central Bank concludes its easing cycle.

ECB Governing Council Axel Weber said that “the massive monetary and fiscal policy measures were right and necessary, but they must not be stepped up or replace a self-sustaining recovery” as the region emerges from the worst recession since the post-war period. At the same time, Mr. Weber stated that now is the time to “start thinking more intensely about” normalizing policy as economic conditions improve, but went onto say that the “stabilization is primarily the consequence of the decisive actions of governments and centrals banks should act as a warning to us against excessive optimism regarding forthcoming developments.” The mixed language held by the board member suggests that the central bank may begin to absorb the excess liquidity pumped into the financial system as the Governing Council maintains its one and only mandate to ensure price stability however, fears of a protracted recovery may lead the ECB to hold the benchmark interest rate at the record-low throughout the first half of the following year as policy makers weigh the prospects for a sustainable recovery.

The British Pound retraced the previous day’s advance against the U.S. dollar and slipped back below the 20-Day SMA (1.6620) to reach a low of 1.6501, and the GBP/USD may continue to a board range throughout the remainder of the week as investors weigh the outlook for future policy. Meanwhile, a survey by the Confederation of British Industry’s showed the index for retail spending increased to 13 in November from 8 in the previous month to mark the highest reading since November 2007, while the gauge that logs the volume of orders jumped to 12 from -3 in October, and the data reinforces an improved outlook for future growth as policy makers see the economy emerging from the worst economic downturn since World War II. However, as the Bank of England sees a risk for a protracted recovery and maintains a dovish outlook for future policy, market participants project the central bank to increase its asset purchase program over the coming months in order to encourage a speedy recovery, and speculation for further easing is likely to drag on the exchange rate as investors curb long-term expectations for higher interest rates in the U.K.

The U.S. dollar bounced back against most of its major counterparts on Thursday, but slipped to a 14-year low against the Japanese yen as the exchange rate tumbled to 86.29 during the overnight trade, and investors may see sharp spikes across the currency market as U.S. traders go off-line for the Thanksgiving holiday. As the economic docket remains fairly light over the next 12 hours of trading, risk trends are likely to drive price action across the financial markets, and a risk in risk appetite is likely to drag the greenback lower as it remains the most popular funding-currency, next to the Japanese yen.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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