Euro, British Pound Remain Relatively Flat Ahead of ECB Rate Decision and U.S. Retail Sales

Talking Points
•    Japanese Yen: Extends Losses
•    Pound: Fails to Hold Above 100-Day SMA
•    Euro: Industrial Outputs Double Forecasts
•    US Dollar: Advance Retail Sales, Import Prices on Tap

Euro, British Pound Remain Relatively Flat Ahead of ECB Rate Decision and U.S. Retail Sales

The Euro was little changed overnight and maintained the narrow range from earlier this week, and the single-currency is likely to face increased volatility going into the U.S. trade as the European Central Bank is scheduled to announce its interest rate decision at 12:45 GMT. The ECB is widely anticipated to hold the benchmark interest rate at 1.00% this month as the central bank aims to balance the risks for the economy, and all eyes will be on President Trichet as he delivers the policy statement at 13:30 GMT.

Nevertheless, the economic docket showed consumer prices in Germany increased 0.8% in December amid an initial forecasts for a 0.7% rise, while the headline reading for inflation expanded at an annual pace of 0.9% to mark the highest reading since February 2009. Furthermore, industrial outputs in the Euro-Zone jumped 1.0% in November to top projections for a 0.5% rise, while the annualized rate slipped 7.1% during the month after tumbling a revised 10.9% in October. The data certainly reinforces an improved outlook for the region and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, as the ECB expects price pressures to remain subdued throughout the year, the Governing Council may keep borrowing costs at the record-low over the coming months as they aim to encourage a sustainable recovery.

The British Pound extended yesterday’s rally to reach a high of 1.6315, but the lack of momentum to hold above the 100-Day SMA at 1.6309 may push the exchange rate back down towards the lower end of its broad range as investors weigh the outlook for future policy. Meanwhile, Bank of England board member Kate Barker held a cautious outlook for the U.K. during an interview with the Portsmouth News and said that the economy is likely to face a “patchy” recovery during the first-half of 2010, but expects to “see positive growth” figures for the fourth quarter of 2009. As policy makers see the economy returning to growth and anticipate price pressures to intensify over the near-term, the central bank may turn increasingly hawkish as they pledge to balance the risks for growth and inflation.

U.S. dollar price action was mixed across the board, the with USD/JPY rising to a high of 92.06 during the overnight trade, and the slew of event risks scheduled for the North American trade is likely to move the markets as investors weigh the prospects for a sustainable recovery in the world’s largest economy. Retail spending in the U.S. is expected to rise 0.5% in December after expanding 1.3% in the previous month, while the import price index is anticipated to increase at an annual pace of 8.6% during the same period, which would be the highest reading since September 2008. Moreover, business inventories are projected to rise 0.3% in November after tipping 0.2% higher during the previous month, and firms may continue to replenish their stock of unsold goods over the coming months as the economy returns to growth.

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