Euro Pares Advance to Hold Below 50-Day SMA, British Pound Maintains November Range

Talking Points
•    Japanese Yen: Rallies Across the Board on Risk Aversion
•    Pound: NIESR, BCC Sees Need For More Public Spending
•    Euro: Investor Confidence Jumps to 18-Month High
•    US Dollar: Consumer Credit, Fed Chairman Bernanke on Tap

Euro Pares Advance to Hold Below 50-Day SMA, British Pound Maintains November Range

The Euro crossed back above the 50-Day SMA (1.4871) during the Asian trade to reach a high of 1.4906, but failed to hold ground and slipped to a low of 1.4756 as the European Central Bank talked down expectations for higher interest in the region. Central bank President Jean-Claude Trichet reiterated that the interest rate remains appropriate during a speech in Paris, and pledged to withdraw the emergency measures in a timely and gradual fashion as the financial system remains weak.

Meanwhile, the economic docket showed investor confidence in the Euro-Zone rose to an 18-month high in December, with the Sentix survey climbing to -5.5 from -7.0 in the previous month, and conditions are likely to improve going forward as the economy emerges from the worst recession since the post-war period. However, a separate report showed factory orders in Germany unexpectedly fell for the first time in eight months as demands weakened 2.1% in October, while the annualize rate tumbled 8.5% from the previous year after rising a revised 12.8% in September. Despite the disappointing developments, the Economy Ministry in Berlin said the trend in manufacturing is “still pointing upward” but expects the rebound in production to “continue in the fourth quarter with weaker dynamism” as the government stimulus begins to taper off. As a result, the ECB is likely to hold borrowing costs at the record-low throughout the first half of the following year in order to support the real economy, and businesses may keep a lid on production and employment in 2010 as global trade conditions remain weak.

The British Pound slipped below the 50-Day SMA (1.6396) to reach a low of 1.6329 but held up ahead of the November low at 1.6260, and the currency is likely to hold a broad range ahead of the Bank of England interest rate decision on Thursday as investors weigh the outlook for future policy. Meanwhile, the National Institute of Economic and Social Research held a cautious outlook for the nation and argued that the government should continue to increase spending and support the fragile economy as growth prospects remain subdued. The group stated that policy makers “should actually loosen fiscal policy in the short-run and then tighten” as conditions improve in order to encourage a sustainable recovery, and went onto say that a provisional income tax reimbursement of nearly 1.0% of GDP would increase economic activity by 0.2% over the next two-years. At the same time, the British Chambers of Commerce said that the government should remain proactive as the economy continues to face “major risks,” and warned that lowering the “fiscal deficit significantly before the economy starts growing again at a more normal pace would be a major mistake, which could unleash a new recession.”

The greenback extended the rally from the previous week and strengthened against most of its major counterparts following the rise in risk aversion, and the reserve currency may continue to appreciate going into the North American session as equity futures foreshadow a lower open for the U.S. market. Nevertheless, consumer credit in the world’s largest economy is expected to contract at an annual rate of $9.3B in October after tumbling $14.8B in the previous month as households continue to face a weakening labor market paired with tightened credit standards, and the data is likely to weigh on the outlook for future growth as private sector spending accounts for more than two-thirds of the economy. Moreover, Fed Chairman Ben Bernanke is scheduled to speak in front of the Economic Club of Washington at 17:00 GMT, and comments from the central bank head could move the foreign exchange market as investors mull over the prospects for monetary policy over the following year.


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