British Pound Gives Back, Euro Advances on Hopes for Greece Bailout

Talking Points
•    Japanese Yen: Down Across the Board
•    Pound: Trade Deficit Widens as Imports Jump
•    Euro: President Trichet Heads to EU Summit Ahead of Schedule
•    US Dollar: Wholesale Inventories, IBD/TIPP Economic Optimism on Tap

British Pound Gives Back, Euro Advances on Hopes for Greece Bailout

The British Pound failed to hold ground during the overnight trade and weakened against the greenback for the fifth day to reach a low of 1.5566, and the currency is likely to face increased volatility over the next 24 hours of trading as the Bank of England is scheduled to release its quarterly inflation report tomorrow at 13:30 GMT. Meanwhile, the BoE’s financial markets law committee criticized the European Union’s draft to increase regulation of the hedge fund industry and said that the law would cause “systemic failure and widespread market disruption” if policy makers were to implement the new measures.

Nevertheless, a report by the British Retail Consortium showed retail spending increased at an annual pace of 1.2% in January after surging 6.0% in the previous month to mark the slowest pace of growth in at least 15 years, while the Royal Institution of Chartered Surveyor home price balance index increased to 32% from 30% amid expectations for a drop to 27%. In addition, the U.K. visible trade deficit widened more-than-expected in December, with the balance slipping to GBP -7.278B from a revised GBP -6.798B as imports increased 5.2% to outpace the 4.5% rise in exports. As policy makers expect to see a “gradual” recovery in 2010, the BoE may hold a dovish outlook for inflation and keep the benchmark interest rate at the record-low throughout the first-half of the year, but the jump in short-term price pressures may lead the central bank to turn increasingly hawkish as they aim to balance the risks for the economy.

The Euro halted the four-day slide against the U.S. dollar and bounced back to reach a high of 1.3747 as market participants speculate European policy makers will come to Greece’s aide after ECB President Trichet took an earlier flight back from a meeting in Sydney to attend an EU summit. However, during a speech in Australia, the European Central Bank head said that central banks face “substantial challenges” as they are faced with the task of balancing the risks for growth and inflation, and said that anchoring inflation expectations is “paramount” as the global economy emerges from the recession. At the same time, the central bank announced it will hold a liquidity-absorbing one-day tender today in order to counteract a “large positive liquidity imbalance,” and said the measure will be offered at a variable rate, with an upper bound of 1%. Meanwhile, the final CPI reading for Germany showed price growth slipped 0.6% in January, while the annualized rate increased 0.8% from the previous year, which was largely in-line with expectations, while the trade surplus narrowed to EUR 13.5B in December from a revised EUR 17.2B, led by a 4.5% rise in imports.

The greenback lost ground against most of its major counterparts as investors raised their appetite for risk, while the USD/JPY retraced the previous day’s decline to reach a high of 89.75, and risk trends are likely to dictate price action going into the North American trade as the economic docket remains fairly light. The IBD/TIPP economic optimism survey for February is scheduled to cross the wires at 15:00 GMT, while market participants forecast wholesale inventories to increase 0.5% in December after rising 1.5% in the previous month, 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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Forex Weekly Trading Forecast - 02.08.10

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