British Pound Remains Range-Bound, Euro Holds below 50-Day SMA as Economic Activity Falter

Talking Points
•    Japanese Yen: Continues to Retrace Previous Week’s Decline
•    Pound: U.K. Retail Sales Expands at Slower Pace
•    Euro: German Industrial Outputs Unexpectedly Falter
•    US Dollar: NFIB Small Business Optimism, API Inventories on Tap

British Pound Remains Range-Bound, Euro Holds below 50-Day SMA as Economic Activity Falter

The British Pound tumbled to a low of 1.6326 during the overnight trade as the economic docket reinforced a weakened outlook for future growth, and fears of a protracted recovery in the U.K. may continue to drag on the exchange rate as investors weigh the prospects for monetary policy going forward. Meanwhile, Moody’s Investor Services said that the U.S. and U.K. could “test the Aaa boundaries” following the expansion in fiscal policy, and went onto say Great Britain is currently facing an “inexorable deterioration of debt affordability” as the government faces its biggest budget deficit since the post-war period.

A survey by the British Retail Consortium showed household spending rose at a slower pace in November, with the index expanding at an annual pace of 1.8% from the previous year after rising 3.8% in the previous month, while a separate report by Halifax showed home prices increased 1.4% in November amid expectations for a 0.6% rise. However, industrial and manufacturing outputs in the U.K. unexpectedly held flat in October after growing a revised 1.3% and 1.5% during the previous month, and businesses may keep a lid on production and employment throughout the first half of the following year as policy makers continue to see a risk for a protracted recovery. At the same time, the Confederation of British Industry’s monthly survey showed the gauge for total orders increased to -42 in December from -45 in the previous month, while the measure of expected outputs slipped to -7 from 4 in November, and the data reinforces a dour outlook for future growth as global trade conditions remain subdued. Nevertheless, as the GBP/USD maintains the broad from the previous month, we are likely to see the pair continue to trend sideways ahead of the Bank of England rate decision on Thursday as investors weigh the outlook for future policy.

The Euro bounced back against the greenback to reach a high of 1.4868 during the overnight trade, but failed to maintain its footing as economic activity unexpectedly weakened in the region. Industrial production in Germany tumbled 1.8% in October despite forecasts for a 1.0% rise, while the annualized rate slipped 12.4% from the previous year after falling a revised 12.6% in the previous month. The breakdown of the report showed construction weakened 2.4% after falling 2.7% in September, while energy outputs plunged 3.4% during the month to lead the decline, and conditions are likely to remain weak going into the following year as businesses face tightening credit conditions paired with fading demands from home and abroad.

The U.S. dollar strengthened during the overnight session as investors scaled back their appetite for higher-yielding currencies, and the greenback may continue to strengthen going into the North American trade as equity futures foreshadow a lower open for the U.S. market. Meanwhile, the National Federation of Independent Business small business optimism survey is scheduled to cross the wires at 12:30, and the data could move the currency market ahead of the U.S. trade as investors weigh the outlook for future growth, while the IBD/TIPP economic optimism index is forecasted to increase to 48.8 in December from 47.9 in the previous month as the economy emerges from the worst recession since the Great Depression. Nevertheless, the Bank of Canada is scheduled to release its policy statement at 14:00 GMT, and the central bank is widely anticipated to hold the benchmark interest rate at the record-low of 0.25% in order to encourage a sustainable recovery however, hawkish commentary following the rate decision could drive the USD/CAD lower as policy makers hold an improved outlook for growth and inflation.

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