Euro Holds Steady, British Pound Pares Friday’s Decline Following Rebound In Risk Sentiment

Talking Points

• Japanese Yen: Advances Across The Board
• Pound: Maintains Range From Previous Week
• Euro: Manufacturing, Service-Based Activity Expand At Slower Pace
• U.S. Dollar: Chicago Fed Index, Thomas Hoenig Testimony on Tap

Meanwhile, Germany’s Deputy Finance Minister Steffen Kampeter held an improved outlook for Europe’s largest economy and sees the growth rate expanding “twice as much as we anticipated at the beginning of the year,” and pledged to tackle the “huge mountain of debt” in order to balance the risks for the region.

Nevertheless, the economic docket showed service-based activity in Germany unexpectedly rose at a faster pace in August as the purchasing manager’s index increased to 58.5 from 56.5 in the month prior, while the survey for manufacturing slipped to 58.2 from 61.1 versus forecast for a 60.5 reading. Moreover, service-based activity in the Euro-Zone expanded at a slower pace during the same period, with the PMI reading falling back to 55.6 from 55.8 in the previous month, while the gauge for manufacturing slipped to 55.0 from 56.7 in July amid forecasts for a 56.1 print. As a result, the composite index for the region pulled back to 56.1 from 56.7, and businesses may scale back on production over the coming months as the outlook for global growth remains clouded with uncertainties. As a result, we are likely to see the European Central Bank maintain a dovish outlook for future policy and support the real economy going into 2011 in an effort to stem the downside risks for the region, but the Governing Council may look to increase its growth forecast at its policy meeting next month as the recovery gathers pace.

The British Pound pared the decline from Friday and rallied to a high of 1.5617 following the rebound in market sentiment, and the GBP/USD may push higher going into the North American trade to test the upper bounds of the narrow range carried over from the previous week. However, as Cable struggles to maintain the overnight rally, the exchange rate may fall lower throughout the day, which could lead the pound-dollar to test the 200-Day SMA at 1.5482 for short-term support. Meanwhile, an article in the Daily Telegraph said that the public sector debt in the U.K. is six-times higher than figures show as it fails to account for pension liabilities in its calculation, and argued that the national debt is GBP 4.8T compared to the GBP 816B figure released by the Office for National Statistics. As the region struggles to manage its public finances, the Bank of England is likely to maintain a loose policy stance throughout the second-half of the year as the government scales back fiscal support and targets the budget deficit, but the stickiness in price growth could spark a increased split within the MPC as inflation continues to hold above the 3% limit.

The greenback lost ground against most of its major counterparts, while the USD/JPY fell back to a low of 85.09 as the Japanese Yen rallied across the board, and risk trends are likely to drive price action throughout the North American trade as the economic docket remains fairly light for Monday. Nevertheless, the Chicago Fed National Activity index is projected to increase to -0.10 in July after tumbling to -0.63 in the month prior, while FOMC board member Thomas Hoenig is scheduled to testify in front of the House Subcommittee on Oversight and Investigations at 14:30 GMT. As Mr. Hoenig continues to dissent against his colleagues and pushes the central bank to drop its dovish pledge to hold the benchmark interest rate close to zero for an “extend” period of time, comments from the hearing could spark increased volatility in the dollar as investors weigh the prospects for future policy.

Will the EUR/USD Continue To Trade Below The 100-Day SMA? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 08-23-10

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

FX Upcoming