Euro Maintains Range From Previous Month, British Pound Little Changed Overnight

Talking Points
•    Japanese Yen: Mixed Across the Board
•    Pound: Little Changed Following Friday’s Rally
•    Euro: Investor Confidence Unexpectedly Improves in March
•    U.S. Dollar: Risk Trends to Dictate Price Action on Lack of Event Risk

Euro Maintains Range From Previous Month, British Pound Little Changed Overnight

The EUR/USD pulled back from the high (1.3701) during the European trade as investors scaled back their appetite for risk, and the single-currency could face increased selling pressures going into the North American session as equity futures foreshadow a lower open for the U.S. market. Meanwhile, French President Nicolas Sarkozy pledged to support Greece “if it were necessary” after meeting with Greek Prime Minister George Papandreou, and said that the states of the Euro-Zone stand “ready” and are “determined” to provide relief for the ailing economy operating under the single-currency.

Nevertheless, investor confidence in the Euro-Zone unexpectedly increased in March, with the Sextix survey rising to -7.5 from -8.2 in the previous month amid forecasts for a drop to -8.8, while the gauge for future expectations increase to 4.50 from 3.75 in February. However, a separate report showed industrial outputs in Germany advanced 0.6% in January, which fell short of expectations for a 1.0% rise, while the annualized rate jumped 2.2% from the previous year to mark the fastest pace of growth since April 2008. As policy makers continue to see a risk for a protracted recovery, businesses are likely to keep a lid on production and employment over the coming months, and the European Central Bank may hold a dovish outlook for future policy going into the second-half of the year as price pressures remain subdued. 

The British Pound was little changed overnight, with the daily RSI holding at 34, and the GBP/USD may is likely to hold a narrow range going into the U.S. trade as the economic docket remains fairly light. However, we may see the exchange rate maintain the downward trend from the January high (1.6456) as market participants see scope for the Bank of England to expand its asset purchase program over the coming months, and dovish rhetoric from the MPC is likely to stoke increased selling pressures on the nation’s currency as the central bank aims to balance the risks for growth and inflation. Nevertheless, the meeting minutes due out on March 17th is likely to spur volatility in the exchange rate after the BoE held the benchmark interest rate at 0.50% and maintained the target for its emergency program at GBP 200B, and a shift in the central bank’s outlook could lead to a major breakout as investors weigh the prospects for future policy.

The greenback was slightly weaker overnight as the stock market rally in Asia spurred a rise in risk appetite, but mixed price action in the European markets could lead to a shift in market sentiment as we head into the U.S. trade. Nevertheless, as the economic docket for North America remains fairly light, the major currencies will certainly be exposed to investors’ temperament for risk, and a rise in risk aversion could lead to a rebound in the U.S. dollar as it continues to benefit from safe-haven flows.


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Forex Weekly Trading Forecast - 03.08.10

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