Euro, British Pound Little Changed Ahead of U.S. Non-Farm Payrolls

Talking Points
•    Japanese Yen: Weighed as Risk Appetite Reemerges
•    Pound: U.K. Output Prices Rise Faster-Than-Expected
•    Euro: Germany Factor Orders Top Forecasts in January
•    U.S. Dollar: Non-Farm Payrolls, Consumer Credit on Tap

Euro, British Pound Little Changed Ahead of U.S. Non-Farm Payrolls

The Euro held a tight range overnight after slipping below the 20-Day SMA (1.3620) during the previous day and the exchange rate is likely to face increased volatility going into the North American trade as economists forecast U.S. non-farm payrolls to contract 68K in February. Meanwhile, European Central Bank President Jean-Claude Trichet said that the unwinding of the emergency measures “shouldn’t be interpreted as a change to our monetary policy” during an interview with the RTBF radio, and reiterated that the interest rate remains “appropriate” as the central bank aims to manage the risks for the economies operating under the single-currency.

As the ECB lowers its forecast for inflation and expects price pressures to remain subdued throughout the year, the Governing Council may hold a neutral policy stance going into the second-half of the year as policy makers expect to see an “uneven” recovery. Nevertheless, the economic docket showed German factory orders jumped 4.3% in January, which well exceeded expectations for a 1.3% rise, while demands increase at an annualize pace of 19.6% from the previous year after rising a revised 7.3% in December. Meanwhile, German Chancellor Angela Merkel said Europe’s largest economy should “stand by” Greece ahead of the meeting with Greek Prime Minister George Papandreou, and went onto say the results of yesterday’s bond issue “gives us cause for optimism” as the government takes additional steps to bring their public finances back in-line with the stability pact requirement.

The British Pound held a tight range overnight and was little changed from the previous day even as the daily RSI continues to hold in oversold territory. Meanwhile, producer price report for the U.K. reinforced a mixed outlook for inflation as input prices tipped 0.1T higher in February amid forecasts for a 0.2% rise, while output costs increase 0.3% during the same period, which topped expectations for a 0.2% expansion. Moreover, the annualize rate advanced 4.1% from the previous year after growing 3.8% in the month prior, while the core PPI increased 0.3% following a revised 0.4% rise in January. Despite higher output prices, the Bank of England held a dovish outlook for inflation and expects price pressures to weaken over the course of the year, and the central bank is likely to hold a wait-and-see approach over the coming months as they aim to balance the risks for the ailing economy.

The greenback was slightly weaker overnight following a rise in risk appetite, with the USD/JPY extending the rally from the previous day to reach a high of 89.43 during the early European trade. Nevertheless, U.S. non-farm payrolls are expected to weaken for the third consecutive month in February, with the annual rate of unemployment projected to increase to 9.8% from 9.7% in January, and the data is likely to spark increased volatility in the dollar cross exchange rates as investors weigh the outlook for a sustainable recovery in the world’s largest economy. In addition, consumer credit is expected to contract $4.5B during the first month of 2010 after slipping $1.7B in December, and the ongoing weakness in the private sector could lead the Federal Reserve to hold the benchmark interest rate the record-low of 0.25% going into the second-half of the year as policy makers aim to encourage a sustainable recovery.


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