Euro Holds Ground Ahead of ECB Rate Decision, British Pound Pares Advance During Overnight Trade

Talking Points
•    Japanese Yen: Weakens Across the Board for Third Day
•    Pound: Service-Based Activity Expands at Slower Pace
•    Euro: 3Q GDP Confirmed at 0.4%, Retail Sales Disappoints
•    US Dollar: ISM Non-Manufacturing, Fed Chairman Bernanke Confirmation Hearing on Tap

Euro Holds Ground Ahead of ECB Rate Decision, British Pound Pares Advance During Overnight Trade

The Euro retracted the previous day’s decline to reach a high of 1.5133 on the back of U.S. dollar weakness, and the single-currency could face increased volatility going into the North American trade as the European Central Bank is scheduled to announce its rate decision at 12:45 GMT. The ECB is widely expected to hold the benchmark interest rate at 1.00% and we may see the EUR/USD hold a narrow range ahead of the Q&A session with central bank President Jean-Claude Trichet as investors weigh the outlook for future policy.

Meanwhile, the economic docket showed service-based activity in the Euro-Zone expanded at a slower pace in November as the PMI reading was revised down to 53.0 from an initial forecast of 53.2, while the composite index held steady at 53.7 to meet market expectations. Moreover, the preliminary GDP reading showed economic activity expanded 0.4% in the third quarter, with the annual rate of growth contracting 4.1% from the previous month, and conditions are likely to improve going forward as the region emerges from t he worst recession since the post-war period. The breakdown of the report showed household consumption slipped 0.2% after holding flat in the second quarter, with exports rising for the first time since the first quarter of 2008, while business investments fell 0.4% during the three-month period amid expectations for a 0.8% drop. At the same time, a separate report showed retail spending unexpectedly held flat in October after falling a revised 0.5% in the previous month, while the annual rate of consumption slipped 1.9% amid expectations for a 2.4% decline.

The British Pound rallied against the greenback for the third-day, but fell back from the high (1.6723) going into the European trade to hold along the 20-Day SMA at 1.6637. Nevertheless, U.K. services expanded at a slower pace in October as the PMI unexpectedly weakened to 56.6 from 56.9 in the previous month however, conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to support the real economy. Meanwhile, the Bank of England said it will consult proposals to amend its corporate bond purchase plan, and stated conditions in the primary market “have improved” but noted trading remains “somewhat restricted.” In addition, the central bank went onto say that it may sell as well as buy corporate bonds going forward as the board pledges to support the financial system. As a result, we may see the GBP/USD hold a broad range ahead of the BoE interest rate decision next Wednesday as market participants anticipate the central bank to maintain its current policy going into the following.

The greenback continued to lose ground on Thursday and weakened against most of its currency counterparts following the rise in risk appetite, and the dollar may face increased selling pressures going into the North American session as equity futures foreshadow a higher open for the U.S. market. Meanwhile, service-based activity in the world’s largest economy is expected to expand at a faster pace in November as economists forecast the ISM index to increase to 51.5 from 50.6, which would be the highest reading since April 2008, while Fed Chairman Ben Bernanke will be in front of the Senate Banking Committee at 15:00 GMT for his confirmation hearing.


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

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