Euro, British Pound Slip to Fresh Yearly Low as U.S. Dollar Advances Across the Board

Talking Points
•    Japanese Yen: Extends Decline Against Greenback
•    Pound: Retail Sales Disappoints
•    Euro: Manufacturing Activity Expands at Faster Pace
•    U.S. Dollar: Consumer Prices on Tap

Euro, British Pound Slip to Fresh Yearly Low as U.S. Dollar Advances Across the Board

The Euro extended the decline from earlier this week and slipped to a fresh yearly low of 1.3443 as investors scaled back their appetite for risk, and the single-currency may face increased selling pressures going into the North American as equity futures foreshadow a lower open for the U.S. market. As a result, the EUR/USD is likely to maintain the downward trending channel from the January high (1.4581), but we may see a corrective retracement going into the following week as the daily RSI approaches oversold territory.

Meanwhile, the economic docket showed producer prices in Germany increased 0.8% in January to top expectations for a 0.3% rise, while the annualized rate slipped 3.4% from the previous year. Furthermore, manufacturing in Europe’s largest economy expanded at its fastest pace since June 2007, with the PMI expanding to 57.1 in February from 53.7 in the previous month, while the gauge for service-based activity unexpectedly slipped to 51.7 from 52.2. As a result, the manufacturing PMI for the Euro-Zone jumped to 54.1 from 52.4 in January, with the services index weakening to 52.0 from 52.5 during the same period, while the composite reading held steady at 53.7 for the second month. The data reinforces an enhanced outlook for the region and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy, but we may see the rebound in growth and inflation taper off over the coming months as policy makers see a risk for a protracted recovery.

The British Pound tumbled to a fresh 2010 low of 1.5347 during the overnight trade following a bigger-than-expected contraction in retail sales, and we may see the GBP/USD continue to retrace the advance from the previous year as policy makers hold a cautious outlook for the economy. Consumer spending in the U.K. tumbled 1.2% in January, which well exceeded forecasts for a 0.5% drop, and households may continue to curb their temperament to spend as they face tightening credit conditions paired with the deterioration in the labor market. Nevertheless, the HM Treasury announced that “there will be a short vacancy on the MPC” as Bank of England board member Kate Barker’s three-year term is scheduled to end on May 31, while the central bank reappointed Spencer Dale as its chief economist and as a member of its governing board.

The greenback rallied across the board, with the USD/JPY rising to a high of 92.10, and the reserve currency may extend its advance going into the North American session as investors curb their appetite for risk. Meanwhile, consumer prices in the U.S. are expected to increase 0.3% in January after tipping 0.1% in the month prior, while the annualized rate is forecasted to expand 2.8% from the previous year. At the same time, the core rate of inflation is projected to hold steady at 1.8% for the second consecutive month, but a bigger-than-expected rise in price growth could certainly boost interest rate expectations 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