Euro Halts Three-Day Decline on U.S. Dollar Weakness, British Pound Bounces Back to Hold November Range

Talking Points
•    Japanese Yen: Mixed Across the Board
•    Pound: U.K. Shop Prices Push Higher on Rising Food Costs
•    Euro: German Trade Surplus Widens as Foreign Demands Improve
•    US Dollar: Wholesale, DOE Inventories on Tap

Euro Halts Three-Day Decline on U.S. Dollar Weakness, British Pound Bounces Back to Hold November Range

The Euro halted the three-day decline and rose to a high of 1.4783 on the back of U.S. dollar weakness, and the single-currency may hold a broad range over the remainder of the week as investors weigh the outlook for future policy. European Central Bank board member Mario Draghi held a cautious outlook for the financial system and said that it would take “several years” for banks to repair their balance sheet, and warned that a rise in global interest rates could hamper the recovery as a “huge wall” of public and corporate debt is due over the next five-years.

Nevertheless, the economic docket showed consumer prices in Germany contracted 0.1% in November amid an initial forecast for a 0.2% drop in inflation, while the annualized rate increased 0.4% from the previous year to top projections for a 0.3% rise. Moreover, Germany’s trade surplus widened to EUR 13.6B from a revised EUR 10.4B in the previous month, which exceeded expectations for a rise to EUR 10.7B, as exports increased 2.5% while imports slipped 2.4% from the previous month. As the outlook for growth and inflation improves, market participants speculate the ECB to tighten policy over the following year as the Governing Council maintains its one and only mandate to ensure price stability however, increased turmoil in the financial sector may lead the central bank to maintain the benchmark interest rate at the record-low throughout the first-half of the following year in order to encourage a sustainable recovery.

The British Pound tumbled to a low of 1.6167 as concerns over Dubai World resurfaced overnight, but bounced back during the European trade to hold within the November range and the GBP/USD may continue to trend sideways ahead of the Bank of England rate decision on Thursday as the MPC is widely anticipated to maintain its current policy going into the following year. Meanwhile, the Nationwide consumer confidence index unexpectedly held at 73 for the second consecutive month in November, which is the highest reading since April 2008, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. At the same time, a report by the British Retail Consortium showed shop prices in the U.K. increased at an annual pace of 0.2% in November after holding flat during the previous month, led by a 2.8% rise in the cost of food, while prices for clothing tumbled 5.5% during the month after falling 5.3% in October. Moreover, the visible trade deficit unexpectedly widened to GBP 7.108B in October from a revised GBP 6.393B in the previous month as imports jumped 4.1% from the previous month, while exports increased 4.7%.

The U.S. dollar weakened during the overnight session and lost ground against all of its major currency counterparts, and the greenback may face increased selling pressures going into the North American trade as U.S. equities futures advance ahead of the open. As the economic docket remains fairly light, risk trends are likely to dictate price action in the foreign exchange market throughout the U.S. session, and the rebound in risk appetite is likely to weigh on the greenback as it remains the most popular funding-currency, next to the Japanese yen. Nevertheless, wholesale inventories in the U.S. are expected to contract 0.5% in October to mark the 14th consecutive monthly decline, while stockpiles of oil and gas are projected to increase 250K and 1600K respectively in the week ending December 4th.


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