U.S. Dollar Continues To Lose Ground, European Central Bank Holds Rate at 1.00%

Talking Points

• Japanese Yen: Gains Ground Against Most Counterparts
• Pound: Manufacturing Expands at Slower Pace
• Euro: 2Q Growth Rate Expands 1.0%
• U.S. Dollar: Pending Home Sales, Factory Orders on Tap

At the same time, ECB President Jean-Claude Trichet will be holding a press conference at 12:30 GMT regarding the decision made by the Governing Council, and the central bank head is likely to talk down the risks for the region as he expects to see a moderate recovery going forward.

Nevertheless, the preliminary 2Q GDP reading for the Euro-Zone showed economic activity expanded 1.0%, which was in-line with expectations, while the annualized rate increased 1.9% from the previous year amid an initial forecast for a 1.7% rise in the growth rate. The breakdown of the report showed household consumption increased 0.5% to top projections for a 0.2% rise, with government spending increasing 0.5%, while gross fixed capital formations advanced 1.8% from the first three-months of the year. At the same time, a separate report showed producer prices in the region increased at an annualized pace of 4.0% in July to mark the fastest pace of expansion since October 2008, and the data reinforces an improved outlook for growth and inflation as the recovery gathers pace. As a result, the ECB may look to revise its economic assessment and drop its dovish outlook for future policy as it maintains its one and only mandate to ensure price stability, and the Governing Council may see scope to reestablish its exit strategy going into 2011 as growth prospects improve.

The British Pound pared the previous day’s advance and slipped to a low of 1.5372 as the economic docket reinforced a weakened outlook for the region, and the GBP/USD may continue to trend lower over the near-term as it maintains the downward trending channel from the August high (1.5997). Meanwhile, the International Monetary Fund warned that the U.K. will need long-term reforms to manage its public finances as the group sees the region’s debt-to-GDP ratio more than doubling by 2015 from 44.1% in 2007, but went onto say that “current market indicators of default risk seem to reflect some market overreaction” as the government takes unprecedented steps to lower the budget deficit. At the same time, the economic docket showed home prices in the region fell more than expected in August as the Nationwide index tumbled 0.9% amid forecasts for a 0.3% decline, while prices increased 3.9% from the previous year, which marked the slowest pace of growth since November. As policy makers withdraw fiscal support despite the ongoing weakness in the real economy, the Bank of England is likely to maintain the expansion in monetary policy as it aims to encourage a sustainable recovery, and the central bank may hold a wait-and-see approach over the coming months as it aims to balance the risks for the region.

The greenback continue to lose ground against most of its major counterparts, with the USD/JPY retracing the previous day’s advance to reach a low of 83.99, and the dollar could face increased selling pressures throughout the day as the economic docket is expected to reinforce a weakened outlook for future growth. Pending home sales in the world’s largest economy is forecasted to fall 1.0% in July after contracting 2.6% in the previous month, while final 2Q reading for nonfarm productivity is projected to show a 1.9% decline amid an initial forecasts for a 0.9% drop. At the same time, factory orders are anticipated to rise 0.2% in July after falling 1.2% in the previous month, but the majors may hold its current range ahead of Friday’s Non-Farm Payrolls release as market participants forecast the U.S. economy to shed another 100K jobs in August.

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

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