Euro Advances for Fourth Day, British Pound Maintains Narrow Range From Previous Week

Talking Points
•    Japanese Yen: Losing Ground Across the Board
•    Pound: U.K. Home Prices Increase for Eight Consecutive Months
•    Euro: ECB Says Fiscal Deficits Need to be Cut in 2010-2011
•    US Dollar: Dallas Fed Manufacturing Activity Index on Tap

Euro Advances for Fourth Day, British Pound Maintains Narrow Range From Previous Week

The British Pound bounced back on Monday to reach a high of 1.5996, but the lack of momentum to cross back above the 200-Day SMA (1.6044) is likely to keep the exchange rate within a tight range over the week as market liquidity remains thin ahead of the New Year. As a result, we are likely to see the GBP/USD maintain the narrow range carried over from the previous week, and we may see price action hold above the 1.5900 level going into the following year as the pair appears to be carving out a short-term bottom.

Nevertheless, the U.K. Hometrack Housing survey reinforced an improved outlook for the region and showed home prices increased 0.1% in December to mark the eighth consecutive monthly advance, while the annualized rate slipped 1.9% from the previous year, which is the smallest decline since May 2008. As the housing market improves, policy makers are likely to hold an enhanced outlook for future growth however; the Bank of England is likely to maintain a dovish bias for future policy as the central bank continues to see a risk for a protracted recovery. As a result, we are likely to see the BoE maintain its currency policy throughout the first-half of the following year, and may look to extend its emergency measures as the global financial system remains fragile.

The Euro tipped higher against the greenback for the fourth day, with the exchange rate rising to a high of 1.4406, and the EUR/USD is expected to hold a narrow range throughout the week as global investors remain offline ahead of New Years day. However, as the euro-dollar remains supported above the 200-Day SMA at 1.4209, we may see the pair continue to retrace the decline from earlier this month as investors raise their appetite for higher-yielding currencies. Meanwhile, European Central Bank President Jean-Claude Trichet said governments which operate under the single-currency must take action over the next two-years to lower their budget deficit, and encouraged commercial banks to provide lending to the economy as financial conditions remain weak. Moreover, President Trichet pledged that the Governing Council will work with local central banks to act as a “reliable anchor” for economic stability, and went onto say that the euro has proven to be trustworthy in “these difficult times” as policy makers took unprecedented steps to stem the downside risks for growth and inflation.

The greenback weakened against most of its major counterparts following the rise in risk appetite, and the reserve currency may face increased selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. Meanwhile, the Dallas Fed Manufacturing Activity survey is expected to reinforce an improved outlook for the world’s largest economy as market participants expect the index to increase 2.0% in December, which would be the biggest rise since October 2007, and conditions are likely to improve throughout the following year as the expansion in monetary and fiscal policy continues to feed through the real economy.

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