Euro, British Pound Dismiss Fundamental Developments as U.S. Dollar Continues to Lose Ground

Talking Points
•    Japanese Yen: Weakens Against the Majors
•    Pound: U.K. Mortgage Approvals Slip to Nine-Month Low
•    Euro: Economic Confidence Hits Two-Year High
•    U.S. Dollar: Personal Income, Spending on Tap

Euro, British Pound Dismiss Fundamental Developments as U.S. Dollar Continues to Lose Ground

Meanwhile, European Central Bank board member Erkki Liikanen said that interest rates will not stay at the record-low levels indefinitely during an interview with the Maaseudun Tulevaisuus, and went onto say that the Governing Council will manage monetary policy “according to the requirements of the economic situation” as the central bank aims to balance the risks for growth and inflation.

Economic confidence in the Euro-Zone increased more-than-expected in March, with the index rising to 97.7 from 95.9 in the previous month to mark the highest reading since May 2008, while the business climate indicator advanced to -0.32 from a revised -0.65 in February to top expectations for a rise to -0.82. At the same time, consumer sentiment survey held steady at -17.0 for the second consecutive month in March, with the gauge for service-based confidence remaining unchanged at 1.0, while industrial confidence increased to -10 from -13 in the month prior. Despite the enhanced figures, the EUR/USD tipped lower immediately following the release and pulled back from the high to hold around 1.3475, and the lack of momentum to cross back above the 20-Day SMA at 1.3584 could keep the pair within the narrow range carried over from the previous week as investors weigh the prospects for future policy.

The British Pound advanced to a high of 1.5018 during the overnight trade despite an unexpected drop in mortgage approvals, but the overnight rally appears to have tapered off ahead of the 20-Day SMA at 1.5054 as price action falls back below the 1.5000 level. Nevertheless, the economic docket for the U.K. showed home loans weakened to an annual pace of 47.1K in February from a revised 48.1K in the previous month amid expectations for a rise to 48.4K, while consumer credit increased GBP 0.5B during the same period after rising a revised GBP 0.3B in January. As households continue to face fading demands for employment paired with tightening credit conditions, the ongoing weakness in the private sector could lead the Bank of England to maintain a dovish policy stance going into the second-half of the year as the central bank continues to see a risk for a protracted recovery, and MPC is widely expected to maintain its currency policy throughout the second quarter as the government aims to support the real economy.

The weakened against all of its major counterparts, with the USD/JPY paring the overnight advance to remain little changed ahead of the North American trade, and the reserve currency could face increased selling pressures over the next 8 hours of trading as market participants raise their appetite for risk. However, private spending in the world’s largest economy is expected to rise 0.3% in February after expanding 0.5% in the previous month, with personal incomes anticipated to hold steady at 0.1% during the same period, and the data could encourage a weakened outlook for future growth as private sector consumption accounts for more than two-thirds of the economy. At the same time, the PCE deflator, which measures inflation tied to spending, is expected to fall back to an annualized pace of 1.8% from 2.1% in January, and the drop in price growth could lead investors to scale back expectations for the Fed to hike rates later this year as the central bank looks to shore up economic activity.


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Forex Weekly Trading Forecast - 03.29.10

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