Euro Halts Three-Day Advance, British Pound Pares Friday’s Decline

Talking Points

• Japanese Yen: Rallies Across The Board
• Pound: BoE Maintains Cautious Outlook
• Euro: Economic Confidence Hits Two-Year High
• U.S. Dollar: Personal Incomes, Spending on Tap

European Central Bank President Jean-Claude Trichet said the budget deficit in the Euro-Zone poses a risk to the economic recovery and argued that “fiscal consolidation will have to be ambitious” while speaking at Jackson Hole, Wyoming, and noted that “interest rate increases could perfectly well take place independently of the phasing out of the non-standard measures if those non-standard measures continue to be fully justified by the situation.”

At the same time, the central bank head went onto say that delivering price stability and anchoring inflation expectations remains the highest priority for the Governing Council, and the ECB is widely expected to maintain the expansion in monetary policy later this week as Mr. Trichet expects to see subdued price growth going forward. As a result, we are likely to see little reaction to the rate decision on Thursday at 11:45 GMT as investors anticipate the central bank to keep the benchmark interest rate 1.00%, but the press conference following the meeting could stoke increased volatility in the exchange rate as market participants weigh the prospects for future policy. Nevertheless, a report by the European Commission showed economic confidence in the euro-area rose to a two-year high in August, with the index advancing to 101.8 from a revised 101.1 in the previous month, which topped forecasts for a 101.6 print, while the gauge for business sentiment unexpectedly slipped to 0.61 from 0.63 in July.

The British Pound pared Friday’s decline and rallied to a high of 1.5575 on Monday, and the GBP/USD may continue to retrace the decline from earlier this month as price action looks poised to test the 20-Day SMA at 1.5658. Meanwhile, Bank of England Deputy Governor Charles Bean held a dovish outlook for future policy at Jackson Hole and said “further policy action may yet be necessary to keep the recovery on track” as the private sector remains weak, and continued to see a “considerable margin of spare capacity” within the real economy as households and businesses face tightened credit conditions. However, as board member Andrew Sentance dissents against the majority and sees scope to slowly lift the interest rate off its lows, there could be a growing split within the MPC as policy makers aim to mitigate the risks for the economy. As a result, the pound-dollar could face ranged-bound price action over the coming months as the central bank stands ready to shift monetary policy in either direction, but the BoE may look to drop its dovish tone going forward as inflation continues to hold above the government’s 3% limit for price growth.

U.S. dollar price action was relatively mixed during the overnight trade, with the USD/JPY falling back below the 20-Day SMA (85.36) to reach a low of 84.56, but the economic releases scheduled for the North American session could drive the greenback higher as the recovery gathers pace. Personal incomes in the world’s largest economy is expected to grow 0.3% in July after holding flat in the previous month, while private-sector spending is forecasted to increase 0.3% during the same period. At the same time, the personal consumption expenditure index, which gauges inflation for the U.S., is projected hold steady at 1.4% for the second month after falling back from 1.5% in May, while the Dallas Fed Manufacturing Activity index is anticipated to fall another 10.0% after contracting 21.0% in the previous month.

Will the EUR/USD Continue To Retrace The Advance From June? Join us in the Forum

Related Articles: Weekly Trading Forecast - 08.30.10

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

FX Upcoming

mailto:dsong@fxcm.com