Euro Holds Narrow Range, British Pound Remains Little Changed on Mixed Data

Talking Points
•    Japanese Yen: Down Across the Board
•    Pound: Consumer Confidence Unexpectedly Weakens in December
•    Euro: Producer Prices Tip Higher in November
•    US Dollar: ISM Non-Manufacturing, FOMC Minutes on Tap

Euro Holds Narrow Range, British Pound Remains Little Changed on Mixed Data

The British Pound rose to a high of 1.6066 during the overnight session, but failed to cross back above the 200-Day SMA at 1.6092 and remains little changed from the previous day as investors anticipate the Bank of England to hold the benchmark interest rate at 0.50% and maintain its GBP 200B asset purchase program at its policy meeting on Thursday. Meanwhile, Chancellor of the Exchequer Alistair Darling said that government will continue to support the economy as the nation has yet to emerge from the recession, and expects the region to return to growth “at the turn of the year” as the expansion in monetary and fiscal policy continues to feed through the real economy.  

Nevertheless, the economic docket showed consumer confidence in the U.K. unexpectedly weakened in December, with the Nationwide survey slipping to 69 from a revised 74 in the previous month, and the data reinforces a dour outlook for future growth as policy makers anticipate the labor market to weaken further this year. At the same time, a report by the British Retail Consortium showed shop prices in the U.K. expanded at an annual rate of 2.2% during the same period after increasing 0.2% in November, led by a 2.2% rise in the cost of food, while a separate report showed service-based activity increased at a fast pace in December, with the PMI increasing to 56.8 from 56.6 to mark the highest reading since August 2007. As economic conditions improve, the BoE is widely anticipated to maintain it’s currently policy this month and may turn increasingly hawkish as price pressures intensify however, the central bank is likely to hold a neutral policy stance going forward as Governor Mervyn King forecasts inflation to fall back below the 2% target by the end of 2010.

The Euro pared the overnight decline after finding short-term support ahead of the 200-Day SMA at 1.4238, and the single-currency may continue hold the narrow range carried over from the previous year as investors weigh the outlook for future policy. Meanwhile, the services PMI for Germany unexpectedly slipped to 52.7 in December from an initial forecast of 53.1, while the gauge for the Euro-Zone increased to 53.6 from 53.0, which fell short of expectations for a rise to 53.7. Furthermore, producer prices in the region grew 0.1% in November after rising a revised 0.3% in the month prior, while the annualize rate slipped 4.4% after tumbling 6.6% in October. In addition, industrial new orders slumped 2.2% in October to forecasts for a 1.0% drop, and the slew of data reinforces a mixed outlook for future growth as policy makers continue to see a risk for a protracted recovery.

U.S. dollar price action was mixed across the board, with the USD/JPY halting the two-decline and crossing back above the 10-Day SMA (91.99) to reach a high of 92.52, and the reserve-currency could face increased volatility going into the North American trade as the Federal Reserve is scheduled to release its policy meeting minutes at 19:00 GMT. Meanwhile, the ADP December employment report is expected to a show a 75K drop in private payrolls, while the ISM Non-Manufacturing index is forecasted to rise to 50.5 from 48.7 in November, and the data is likely to encourage an improved outlook for growth as the economy emerges from the worst recession since the Great Depression. At the same time, equity futures foreshadow a lower open for the U.S. market, and a rise in risk aversion is likely to drive the greenback higher as the dollar continues to benefit from safe-haven flows.

Will the EUR/USD Maintain the Narrow Range Carried Over From December? Join us in the Forum

Related Articles:

Forex Technical and Fundamental Forecasts for January

To discuss this report contact David Song, DailyFx Research: dsong@fxcm.com