Euro Advances for Second Day on Risk Appetite, British Pound Halts Three-Day Decline

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: Fails to Cross Back Above 200-Day SMA
•    Euro: German Consumer Confidence Weakens for Fourth Month
•    US Dollar: Existing Home Sales, Dallas Fed Manufacturing Index on Tap

Euro Advances for Second Day on Risk Appetite, British Pound Halts Three-Day Decline

The Euro advanced against the greenback for the second day to reach a high of 1.4192 during the overnight trade, and the single-currency may continue to push higher going into the North American session as investors raise their appetite for risk. Meanwhile, European Central Bank board member Ewald Nowotny said economic activity in Eastern Europe is recovering faster than anticipated according to an article on the Financial Times, and assured that the central bank will implement a “steady-hand approach” to normalize policy as the euro-region emerges from the worst recession since the post-war period.

At the same time, Governing Council member Juergen Stark said that Greece will not be bailed out by its European counterparts or the International Monetary Fund during an interview with Welt am Sonntag, and held a neutral outlook for future policy as the central bank sees “neither inflation nor deflation risks in the next 18 to 24 months.” As a result, the ECB is widely anticipated to maintain the benchmark interest rate at the record-low of 1.00% at its next rate decision on February 4, and the Governing Council may hold a neutral policy stance throughout the first-half of the year as they expect price pressures to remain subdued. Nevertheless, the economic docket showed consumer confidence in Germany weakened for the fourth month in February, with the GfK survey slipping to 3.2 from a revised 3.4 in the previous month, and households may continue to scale back their outlook for the economy as they face fading demands for employment paired with tightening credit conditions.

The British Pound halted the three-day decline and bounced back against the U.S. dollar to reach a high of 1.6176, but the lack of momentum to cross back above the 200-Day SMA at 1.6184 may keep the exchange change within a narrow range over the next 24 hours of trading as investors wait for the advanced fourth-quarter GDP report due out on Tuesday at 9:30 GMT. Meanwhile, the Bank of England said that it will keep its emergency program “under review, taking into account the size of the Facility’s holdings relative to the nominal amount of those stocks in issue and their relative richness to the yield curve” in its fourth-quarter Asset Purchase Facility report, and investors speculate the central bank to maintain its current policy next month as policy makers aim to balance the risks for growth and inflation.

The greenback lost ground overnight following the rise in risk appetite, while the USD/JPY ended the two-day slide to reach a high of 90.38, and the reserve-currency may face broad-based selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. Nevertheless, existing home sales in the world’s largest economy is projected to fall 9.8% in December after rising 7.4% in the previous month, which will drag down the annualized reading to 5.90M from 6.54M in November. At the same time, the Dallas Fed manufacturing activity index is forecasted to increase to 6.0% in January from 3.8% in the month prior, which would be the highest reading since June 2007, and conditions are likely to improve going forward 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