Euro Extends Decline on Risk Aversion, British Pound Halts Five Day Rally

Talking Points
•    Japanese Yen: BoJ Talks Down Risk For Double-Dip Recession
•    Pound: Finds Short-Term Resistance at 50-Day SMA
•    Euro: Exports Weaken for Second Month, CPI Rises
•    US Dollar: CPI, U. of Michigan Confidence Survey on Tap

Euro Extends Decline on Risk Aversion, British Pound Halts Five Day Rally

The Euro extended the previous day’s decline and slipped below the 20-Day SMA (1.4383) to reach a fresh weekly low of 1.4377, and the single-currency could face increased selling pressures going into the North American trade as equity futures foreshadow a lower open for the U.S. market. Meanwhile, European Central Bank President Jean-Claude Trichet was on the wires overnight and reiterated that he backs a strong U.S. dollar policy, and went onto say countries that are currently facing major debt issues will have to ultimately help themselves.

Nevertheless, consumer prices in the Euro-Zone increased 0.3% in December, which was largely in-line with expectations, while the headline reading for inflation expanded 0.9% from the previous year after increasing 0.5% in December. Moreover, the core CPI rose to an annualized pace of 1.1% to top forecasts for a reading of 1.0%, and price pressures may continue to intensify over the coming months on the back of higher commodity prices. At the same time, a separate report showed the trade surplus narrowed more than expected in November, with the seasonally adjusted reading slipping to EUR 3.9B from a revised EUR 4.7B in the previous month, led by a 0.4% drop in exports, and the marked appreciation in the exchange rate may continue to weigh on the economy as global trade conditions remain weak. Meanwhile, wholesale prices in Germany increased 0.2% in December amid expectations for a 0.5% rise, while the annualized rate increased 0.2% from the previous year after contracting 3.2% in the previous month to mark the first rise since October 2008.

The British Pound halted the five-day rally after reaching a fresh weekly high of 1.6358, and slipped back below the 100-Day SMA (1.6310) to trade around the 1.6290 level. As price action fails to hold above the 50-Day SMA at 1.6343, we could see the GBP/USD maintain the broad range carried over from December, and the pair may continue to trend sideways over the following week as investors weigh the outlook for future policy. However, the economic docket for the following week is expected to show consumer prices rise to an annual pace of 2.5% in December, with the core rate of inflation forecasted to increased to 2.2% from 1.9% in the previous month, and the data could trigger a bullish breakout in the pound-dollar as price pressures exceed the Bank of England’s 2% target for inflation for the first time since May.

The greenback strengthened against most of its major counterparts as investors scaled back their appetite for risk, while the USD/JPY extended yesterday’s decline to reach a fresh weekly low of 90.60. Meanwhile, consumer prices in the U.S. is projected to rise 0.2% in December after advancing 0.4% in the previous month, while the annualized rate is anticipated to increase 2.8% from the previous year, which would be the highest reading since October 2008. Moreover, industrial outputs are expected to expand 0.6% for the same period after rising 0.8% in November, while the U. of Michigan confidence survey is forecasted to reach a 1-year high of 74.0 in January from 72.5 in the month prior. The data is likely to spark increased volatility in the U.S. dollar as investors weigh the prospects for a sustainable recovery, and the rise in growth and inflation is likely to spur expectations for higher interest rates as the Federal Reserve aims to normalize policy this year.

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