U.S. Dollar, Japanese Yen Benefit From Flight To Safety

Talking Points

• Japanese Yen: Rallies Across The Board
• Pound: Breaks Below 200-Day SMA
• Euro: ECB To Revise Economic Forecast
• U.S. Dollar: May Continue To Benefit From Safe-Haven Flows

As the EUR/USD breaks out of its narrow range, with the exchange rate crossing below the 50-Day SMA at 1.2730, the euro-dollar may continue to retrace the rally from June over the following week, but the improved outlook held by European policy makers may boost interest rate expectations in the months ahead as the economic recovery gathers pace.

Bundesbank President Axel Weber said monetary policy remains “appropriate” and see’s scope for the European Central Bank to raise its growth forecast as the region continues to benefit from the rise in global trade, but went onto say that the Governing Council will discuss its exit strategy in the first quarter of 2011 as the outlook for future growth remains clouded with uncertainties. The comments suggests that the ECB will continue to support the real economy and keep interest rates on hold throughout the rest of the year as the governments operating under the fixed-exchange rate system withdraw fiscal support, and market participants may scale back expectations for a rate hike going into 2011 as policy makers maintain a dovish outlook for inflation. Meanwhile, the European Union said the austerity measures taken on by Greece seem “sufficient to reach the 2010 budgetary deficit ceiling targets” as the government takes unprecedented steps to lower its budget deficit, but went onto say policy makers must “safeguard adequate liquidity and financial stability of the banking sector” as the European financial system remains fragile.

The British Pound broke out of its narrow range and slipped below the 200-Day SMA (1.5487) to reach a fresh weekly low of 1.5462, but the GBP/USD appears to be retracing the overnight decline ahead of the U.S. trade, which could lead the exchange rate to hold steady going into the end of the week. However, as the pound-dollar fails to maintain the upward trending channel from the June low, there could be a short-term consolidation as investors weigh the outlook for future policy, but a close below the 200-Day SMA could lead the exchange rate to test the 50-Day SMA at 1.5325 if the downturn in market sentiment carries over into the following week.

The greenback bounced against most of its major counterparts, while the USD/JPY slipped to a low of 85.18 as the Japanese Yen rallied across the board, and the rise in risk aversion is likely to carry into the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic calendar remains bare for Friday, risk trends are likely to dictate price action in the currency market as we head into the end of the week, and the low-yielding currencies may continue to appreciate throughout the day as they benefit from the flight to safety.

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

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