Euro Extends Decline as Investor Confidence Falters, U.K. Inflation Jumps at Record Pace

Talking Points
•    Japanese Yen: Benefitting From the Rise in Risk Aversion
•    Pound: Inflation Rises at the Fastest Pace on Record
•    Euro: German Investor Confidence Weakens for Fourth Month
•    US Dollar: TIC Flows, NAHB Housing Index on Tap

Euro Extends Decline as Investor Confidence Falters, U.K. Inflation Jumps at Record Pace

The Euro extended the decline from the previous day and slipped to a low of 1.4303 during the overnight trade as the economic docket reinforced a weakened outlook for future growth, and the single-currency looks poised to test the 200-Day SMA (1.4288) for short-term support as investors scale back their appetite for risk. At the same time, the European Central Bank initiated a two-year program which aims to strengthen bank supervision with countries that are taking steps to join the European Union,

Nevertheless, investor confidence in Germany weakened for the fourth consecutive month in January, with the ZEW survey slipping to 47.2 from 50.4 in the previous month, while the gauge of the current situation increased to -56.5 from -60.6 in December, which fell short of expectations for a rise to -56.2. Moreover, the ZEW survey for the Euro-Zone weakened to 46.4 during the same period from 48.0 as the majority anticipates the ECB to maintain its current policy over the next six-months, and the central bank is likely to hold a dovish outlook for future policy as price pressures remain subdued. Meanwhile, a separate report showed construction outputs in the euro-region fell 1.1% in November after falling a revised 0.4% in the previous month, and the ongoing weakness in the domestic economy may continue to weigh on growth and inflation as households face a weakening labor market paired with tightening credit conditions.

The British Pound advanced against the greenback for the second-day, with the exchange rate crossing above the 50-Day SMA (1.6330) to reach a high of 1.6460, and the slew of market-moving event risks due out this week are likely to stoke increased volatility in the GBP/USD as investors weigh the outlook for future policy. A report by the Office for National Statistics showed consumer prices in the U.K. increased 0.6% in December to top forecasts for a 0.3% rise, while the annualized rate jumped to 2.9% from 1.9% the in the previous month to mark the fastest pace of growth since recordkeeping began in 1997. The breakdown of the report showed transportation costs surged 8.7% from the previous year, led by an 18.1% rise in petro & oil prices, while the cost of food and beverages increased 1.6% after advancing 1.3% in November. As price pressures intensify, investors speculate the Bank of England to conclude its easing cycle and start normalizing policy over the coming months as the central bank aim to balance the risk for growth and inflation.

U.S. dollar price action was mixed across the board, with the USD/JPY slipping to a low of 90.31 during the overnight trade, and the greenback may face increased volatility going into the North American trade as the Bank of Canada is scheduled to announce its interest rate decision at 14:00 GMT. Nevertheless, net long-term TIC flows are forecasted to widen to $27.5B in November from $20.7B in the previous month, while the NAHB housing market index is expected to increase to 17 from 16 in December, and the data is likely to encourage an improved outlook for the world’s largest economy as it 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 drop in risk appetite would push the greenback higher as the reserve currency continues to benefit from safe-haven flows.

Will the EUR/USD Maintain Its Current Range Throughout the Month? Join us in the Forum

Related Articles:

Forex Weekly Trading Forecast - 01.18.10

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