Euro Extends Advance as EU Meets on Common Ground, British Pound Maintains Narrow Range

Talking Points
•    Japanese Yen: Remains Mixed Against the Majors
•    Pound: 4Q Business Investments Weakens at Record Pace
•    Euro: EU Reaches an Agreement for Greece
•    U.S. Dollar: Final 4Q GDP, U. of Michigan Confidence on Tap

Euro Extends Advance as EU Meets on Common Ground, British Pound Maintains Narrow Range

However, the EU continued to hold a cautious outlook for the region and said that the recovery remains “fragile” as the economies operating under the single-currency face “excessive levels of debt, sluggish structural growth and high unemployment.”

At the same time, European Central Bank President Jean-Claude Trichet said that he’s “extraordinarily happy that the governments of the euro around found out a workable solution” after arguing that an IMF bailout “would clearly be very, very bad” during an interview on the Public Senat network in France, but went onto say that the recovery will be “modest” in 2010 as he forecasts the growth rate to expand 1% or less from the previous year. Meanwhile, Moody’s Investor Services said that the ECB’s decision to extend its collateral rules into 2011 should help to lower the liquidity risks for Greece, but noted that the efforts by the central bank has limited impact on the nation’s credit rating as the government struggles to bring its public finances back in-line with EU standards. Nevertheless, as the EUR/USD fails to cross back above former support at 1.3425, the pair is likely to maintain the decline from December, but the rebound in the daily RSI could lead the euro-dollar to test the upper bounds of the downward trending channel over the following week as the economic docket is expected to reinforce an improved outlook for the region.

The British Pound tipped higher during the European trade to reach a high of 1.4891, but continued to maintain the narrow range carried over from earlier this month as investors weigh the prospects for future policy. As a result, we are likely to see the pound-dollar continue to trend sideways over the following week as the Bank of England maintains a cautious outlook for the economy, and dovish comments from the central bank are likely to add downward pressures on the exchange rate as policy makers expect inflation to fall back below the 2% target later this year. The economic docket for the U.K. showed business investments tumbled 4.3% during the fourth quarter amid an initial forecast for a 5.8% decline, while the annualized rate slipped 23.5% from the previous year to mark the biggest decline since record keeping began in 1967. As the private sector remains weak, the central bank is likely to maintain the expansion in monetary policy going into the second-half of the year in an effort to encourage a sustainable recovery, but fears of a protracted recovery may lead the MPC to expand its asset purchase target over the coming months as policy makers see a risk for another contraction in GDP.

The greenback was modestly lower against most of the major currencies during the overnight trade, with the USD/JPY pulling back to a low of 92.30, and the current trend is likely to carry into the U.S. trade as market liquidity thins ahead of the weekend. Nevertheless, the final 4Q GDP reading is expected to show a 5.9% expansion in the growth rate, while personal consumption is forecasted to increase 1.7% following the 2.8% rise during the three-months through September. However, the U. of Michigan confidence survey for March is expected to increase to 73.0 from an initial forecast of 72.5 seen earlier this month, and an upward revision in the index is likely to encourage an improved outlook for the world’s largest economy as the recovery gathers momentum.


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