Euro Tumbles to Three-Month Low, British Pound Stumbles as U.K. Retail Sales Disappoints

Talking Points
•    Japanese Yen: Strengthens on Risk Aversion
•    Pound: U.K. Retail Sales Unexpectedly Falls
•    Euro: Construction Outputs Weaken for Sixth Month
•    US Dollar: Leading Indicators, Philadelphia Fed on Tap

Euro Tumbles to Three-Month Low, British Pound Stumbles as U.K. Retail Sales Disappoints

The Euro continued to retrace the advance from August and slipped to a three-month low of 1.4355 on the back of U.S. dollar strength, and the single-currency may face increased selling pressures going into the North American trade as equity futures foreshadow a lower open for the U.S. market. However, as the EUR/USD remains oversold, with the daily RSI holding at 27, we may see a corrective retracement going into the end of the week as price action holds above the September low (1.4177), which nearly coincides with the 200-Day moving average at 1.4174.

Meanwhile, the European Central Bank said that commercial banks made a EUR 96.9B bid during its final tender of 12-month loans, which exceeded market expectations for a EUR75.0B rise in bank lending, and the central bank is widely expected to maintain its current policy throughout the first-half of the following year in order to encourage a sustainable recovery. Nevertheless, the economic docket showed construction outputs in Euro-Zone weakened for the sixth consecutive month in October, with the index slipping 0.6% after falling a revised 0.8% in the previous month, while the annualized rate declined 7.7% from the previous year. The data reinforces a weakened outlook for future growth as policy makers anticipate to see a gradual recovery in 2010, and the ECB is likely to hold a dovish bias for future policy going into the following year as price pressures remain subdued.

The British Pound broke out of its recent range and tumbled to a fresh monthly low of 1.6080 following an unexpected drop in retail sales, and a break below the 1.6000 level may lead the GBP/USD to test the 200-Day SMA at 1.5983 for near-term support as the pair continues to retrace the rebound from October. Household spending in the U.K. slipped 0.3% in November amid expectations for a 0.5% rise, while the annualized rate increased 3.1% from the previous year after expanding a revised 3.7% during the previous month. Moreover, a survey by the Confederation of British Industry showed its gauge for retail spending held at 13 for the second consecutive month in December amid an initial forecast for a rise to 19, while the volume of sales increased to a three-month average of 11 from 8 in November. The data suggests that households remain reluctant to spend as policy makers continue to see a risk for a protracted recover however, the unexpected drop in unemployment should help to encourage an improved outlook for future growth as the expansion in monetary and fiscal policy continues to feed through the real economy.

The greenback strengthened across the board, with the USD/JPY tipping higher for the third-day, and the reserve currency may continue to appreciate going into the U.S. session as it benefits from the rise in safe-haven flows. Nevertheless, the leading indicator for the world’s largest economy is forecasted to rise 0.7% in November after rising 0.3% in the previous month, while the Philadelphia Fed’s manufacturing index is expected to weaken to 16.0 in December from 16.7 in the month prior as businesses keep a lid on production. Moreover, Fed Chairman Ben Bernanke’s confirmation heading in front of the Senate Banking Committee is scheduled for 14:30 GMT, while Dallas Fed President Richard Fisher will be speaking on the global economy at 18:00 GMT.


Will the EUR/USD Be Able to Find Support at the 200-Day SMA? Join us in the Forum

Related Articles:

US Fed Forces Dollar Volatility on Rate Decision

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