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Euro, British Pound Fall Back From Highs as Risk Appetite Wavers Ahead of U.S. Trade

The British Pound halted the two-day decline against the U.S. dollar and pushed to a high of 1.6595 during the overnight trade, but the lack of momentum to cross back above the 20-Day SMA (1.6626) may keep the pair within a broad range throughout the week as investors weigh the outlook for future policy.

Talking Points
•    Japanese Yen: USD/JPY Remains Oversold, RSI Tumbles to 23
•    Pound: U.K. Mortgage Approvals Top Forecasts
•    Euro: Consumer Price Estimate Rises In November
•    US Dollar: Chicago PMI, Dallas Fed Index on Tap

Euro, British Pound Fall Back From Highs as Risk Appetite Wavers Ahead of U.S. Trade

The British Pound halted the two-day decline against the U.S. dollar and pushed to a high of 1.6595 during the overnight trade, but the lack of momentum to cross back above the 20-Day SMA (1.6626) may keep the pair within a broad range throughout the week as investors weigh the outlook for future policy. The Bank of England is widely anticipated to hold the benchmark interest rate at the record-low and maintain its GBP 200B asset purchase program next month as policy makers see the nation emerging from the worst recession since the post-ward period however, BDO Stoy Hayward argued that the central bank’s growth projections remains “too optimistic” as the group sees economic activity expanding less that 0.5% over the next six months.

Nevertheless, a report by the BoE showed mortgage approvals in the U.K. increased 57.3K in October to mark the highest level of lending since March 2008, while consumer credit tumbled 0.6B during the same period, which is the biggest decline since the series began in 1993. Moreover, a separate report showed consumer confidence unexpectedly fell for the first time this year as the GfK survey weakened to -17 from -13 in October, while home prices in the U.K. rose 0.2% for the third consecutive month in November, according to the Hometrack Housing survey. The data reinforces a weakened outlook for private sector spending as households continue to face tightening credit conditions paired with fading demands for employment, and the central bank may take additional steps to encourage a sustainable recovery as the MPC keeps an “open mind” for future policy.

The Euro bounced back against the greenback and jumped to a high of 1.5086 during the Asian trade, and the single-currency may continue to retrace the sell-off from the previous year as the rally remains well-support by the 50-Day SMA at 1.4846. Meanwhile, a report by the European Union statistics office showed the CPI estimate increased 0.6% in November to mark the first rise in seven months, driven by rising energy prices, and the rebound in price growth may lead the European Central Bank to hold a hawkish outlook going forward as the economy returns to growth. The ECB is expected to hold borrowing costs at 1.00% later this week and is likely to maintain its EUR 60B covered bond purchases as the recovery remains weak however, market participants may continue to ramp up long-term expectations for higher interest rates in Europe as the Governing Council expects price pressures to strengthen over the following year.

The U.S. dollar weakened across the board following the rise in risk appetite, but the greenback looks to be regaining its footing as the slump in European equities weighs on investor sentiment. As equity futures foreshadow a lower open for the U.S. market, a rise in risk aversion could drive the greenback higher as the reserve currency continues to benefit from safe-haven flows. Meanwhile, economic activity in the Mid-West is expected to expand at a slower pace in November as economists forecast the Chicago PMI to fall to 53.3 from a 13-month high of 54.2 in the previous month, while the Dallas Fed Manufacturing Activity index is expected to hold flat for the same period after contracting 3.3% in the previous month.


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Forex Weekly Trading Forecast - 11.30.09

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

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