Euro Rebounds Despite Drop in Sentix Survey, British Pound Extends Decline

Talking Points
•    Japanese Yen: Weighed by Risk Appetite
•    Pound: Extends Decline From Previous Week
•    Euro: Investor Sentiment Unexpectedly Weakens
•    US Dollar: Lack of Fundamental Releases to Give Way to Risk Trends

Euro Rebounds Despite Drop in Sentix Survey, British Pound Extends Decline

The Euro halted the three-day slide against the greenback and rose to a high of 1.3718 during the European trade despite an unexpected drop in investor confidence, and the single-currency may continue to retrace the decline from the previous week as investors raised their appetite for risk. Meanwhile, European Central Bank board member Ewald Nowotny voiced his support for increased regulation of the global financial market and said stricter guidelines would not hamper the economic recovery, but warned that policy makers were acting “too slow” during an interview with Wiener Zeitung.

Moreover, Mr. Nowotny said that the spread on European government bonds are coming under pressure due to “speculative exaggeration” of risk, and the ongoing turmoil in PIGS (Portugal, Ireland, Greece, and Spain) may lead the Governing Council to maintain a dovish outlook for future policy as they aim to encourage a sustainable recovery throughout the euro-region. Nevertheless, investor confidence in the Euro-Zone weakened for the first time in seven months, with the Sentix survey slipping to -8.2 in February from -3.7 in the previous month, while the gauge for future expectations slumped to 3.75 from 11.25 in January. The data suggests investors are turning increasingly cautious as policy makers expect to see a protracted recovery this year, and the drop in interest rate expectations may continue to weigh on the exchange rate as the ECB anticipates price growth to remain subdued over the medium-term.

The British Pound tumbled lower for the fourth-day, with the exchange rate slipping to a low of 1.5534, and we are likely to see the GBP/USD face increased volatility throughout the week as the Bank of England is scheduled to release its quarterly inflation report on Wednesday at 10:30 GMT. However, as the daily RSI, which currently stands at 25, continues to push deeper into oversold territory, we may see a corrective retracement this week as price action holds above the psychological support at 1.5500. The BoE is expected to update its economic forecast this month and may hold a hawkish outlook for future policy as price pressures rise at a record-pace, but we may see the central bank discount the shift in near-term inflation as Governor Mervyn King forecasts price growth to fall back below the 2% target towards the end of 2010.

U.S. dollar price action was mixed overnight, with the USD/JPY advancing to a high of 89.57, and the reserve currency may continue to lose ground going into the North American session as investors feed their appetite for risk. The lack of economic releases could certainly produce muted price action and keep dollar cross rates within a narrow range throughout the day, but a shift in risk sentiment could spark volatility in the currency market as investors weigh the prospects for a sustainable recovery in the global economy.

Will the EUR/USD Continue to Retrace the Decline From January? Join us in the Forum

Related Articles: 

Forex Weekly Trading Forecast - 02.08.10

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