British Pound Advances as Economic Outlook Improves, Bundesbank Raises 2010 Growth Forecast

Talking Points

• Japanese Yen: Weakens Against Most Counterparts
• Pound: Retail Spending, Public Finances Improve
• Euro: Bundesbank Raises Growth Forecast
• U.S. Dollar: Leading Indicator, Jobless Claims on Tap

A report by the Office for National Statistics showed public sector net borrowing increased GBP 3.2B in July amid forecasts for a GBP 4.8B rise, while the previous month’s reading was revised down to GBP 13.9B from an initial forecast of GBP 14.5B.

At the same time, retail spending in Britain jumped 1.1% during the same period versus expectations for a 0.3% expansion, with sales excluding auto fuel advancing 0.9% amid projections for a 0.2% rise., while the CBI industrial trends orders survey increased to -14 in August from -16 on the previous month, which is the highest reading since 2008. As the rebound in economic activity gathers pace, the Bank of England may see scope to gradually normalize monetary policy over the coming months, and the central bank is likely to drop its dovish outlook going forward as it expect inflation to hold above the 2% target in 2011. However, a survey by the Bank of England showed mortgage approvals by the major banks in the U.K. increased 47K in July after expanding 48K in the previous month, and the central bank may look to support the real economy throughout the second-half of the year as household and businesses continue to face tightening credit conditions.

The Euro bounced back from a low of 1.2771 as policy makers held an improved outlook for the region, and the EUR/USD may hold steady going into the North American session as it retraces the selloff from the overnight trade. The Bundesbank raised its growth forecast for Europe’s largest economy and sees GDP expanding at an annualized pace of 3.0% this year amid an initial forecast for a 1.9% rise in the growth rate, and the central bank went onto say that the “fundamental economic situation in Germany is very favorable at the moment” as the region continues to benefit from the rebound in global trade. As a result, the Bundesbank expects the rise in economic activity to gather pace throughout the remainder of the year, and sees “a continuation of moderate upward price developments” following the record pace of expansion in the second quarter. Meanwhile, the economic docket showed producer prices in Germany increased 0.5% in July, which topped projections for a 0.1%, while prices increased at an annualized pace of 3.7% to mark the fastest pace of growth since December 2008.

U.S. dollar price action was mixed during the overnight trade, with the USD/JPY retracing the decline from earlier this week to a reach a high of 85.91, and market sentiment may play an increased role in driving price action throughout the North American trade as the economic docket remains fairly light for Thursday. Equity futures are foreshadowing a higher open for the U.S. market following the rise in European stocks, and a further rise in risk appetite could generate dollar weakness as investors move into higher-yielding currencies. Nevertheless, initial and continuing jobless claims in the U.S. are expected to fall back during the first two-weeks of August, while the leading indicator is forecasted to increase 0.1% in July after contracting 0.2% in the previous month, and the data could support the rise in market sentiment as the outlook for future growth improves.

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

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