Euro, British Pound Consolidate Following the Rise in Risk Appetite

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: U.K. Public Borrowing Rises at Record Pace
•    Euro: German Business Confidence Hits 17-Month High
•    US Dollar: Risk Trends to Drive Price Action

Euro, British Pound Consolidate Following the Rise in Risk Appetite

The British Pound bounced back during the European trade and rose to a high of 1.6251 on Friday following the rise in risk appetite, and the currency may continue to hold a narrow range as market liquidity thins going into the weekend. Nevertheless, the Bank of England Financial Stability report said the U.K. financial system has become “significantly more stable” as a result of the unprecedented steps taken on by the government, but went onto say that the “probability of default by U.K. real estate companies has increased significantly” as households continue to face a weakening labor market paired with tightening credit conditions.

Moreover, the central bank said that the withdrawing government support could fuel volatility in asset-price as banks’ balance sheets “remain stretched”, and saw a risk for dollar-funded trades to be unwound going into the following year as central banks worldwide look to normalize policy in 2010. At the same time, a separate report by the central bank showed mortgage approvals by the major banks in the U.K. increased to 63K in November from a revised 60K in the previous month, while the M4 money supply failed to grow during the same period after expanding a revised 1.7% in October. In addition, consumer confidence in the U.K. weakened in December, with the GfK survey falling back to -19 from -17 in the previous month, while business investments slipped 0.6% in the third quarter amid an initial forecast for a 3.0% decline. Moreover, public borrowing in the U.K. rose at a record pace in November as the budget deficit increased GBP 20.3B after rising GBP 15.5B in the previous year, and the deterioration in public finances are likely to weigh on the outlook for long-term stability as the nation remains at risk of losing its AAA sovereign credit rating.

The Euro halted the three-day decline against the greenback and bounced back to reach a high of 1.4413, while the RSI climbed back to hold above 30 after slipping into oversold territory during Thursday’s session. Meanwhile, business confidence in Germany rose to a 17-month high in December as the IFO’s index topped forecasts and climbed to 94.7 from 93.9 in the previous month, while their gauge for future expectations increased to 99.1 from 98.9 as policy makers raised their growth outlook for 2010. Moreover, producer prices in the region grew 0.1% in November after holding flat during the previous month as fuel and mining costs increased 1.2%, while the annualized rate slipped 5.9% from the previous year after tumbling 7.6% in October. Meanwhile, the Euro-Zone trade surplus widened to a seasonally adjusted EUR 6.3B from a revised EUR 4.3B in September as the decline in imports outpaced the drop in exports, while the current account deficit narrowed to EUR 4.6B from a revised EUR 5.0B in the previous month.

The U.S. dollar lost ground following the rebound in risk appetite, but continued to rally against the Japanese yen to reach a high of 90.35 during the overnight trade and the reserve currency may face increased volatility going into the North American session as equity futures foreshadow a higher open for the U.S. market. The lack of event risk will certainly leave the greenback at the mercy of investor sentiment, and we may see erratic movements in the major exchange rates ahead of the holiday period as market liquidity tapers off.


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