Currency Markets to Face Increased Volatility During the North American Session Amid U.S. Labor Day Holiday

Talking Points

• Japanese Yen: Rallies Against Most Major Currencies Overnight
• Pound: New Car Registrations Drop 17.5 Percent in August
• Euro: Sentix Investor Confidence Unexpectedly Declines
• U.S. Dollar: Markets Closed in Observance of the Labor Day Holiday

During the overnight trade, the euro looked for direction against the greenback as traders digested the recent nonfarm payrolls report from the world’s largest economy, which fell less than economists’ expectations. At the same time, the economic docket was fairly muted as market participants were faced with the Euro-zone Sentix investor confidence report. Figures unexpectedly pushed lower in September, and were weighed predominately by the current situation component. In the coming months, the euro may come back under pressure as governments implement tough austerity measures in order to battle their ballooning budget deficits, which will in turn weigh on growth. However, I do not rule out a change in sentiment in the near term as risk appetite may regain its footing as market participants rule out a double dip recession in developed economies.

The news wire from the 16 member euro area was fairly muted today; however, yesterday, the Financial Times reported that governments in the bloc will attempt to raise approximately 80 billion euros. This does not bode well for the weaker economies in their attempt to raise the necessary capital. Worth noting, ECB council member Ewald Nowotny said that he central bank will wait until December before discussing exit steps as the economic outlook shows “very high uncertainty.” Looking ahead, optimism may lead the euro higher in the short term, with a possible test back towards 1.3000. For the medium term, the euro will likely come back under pressure, with the U.S. dollar befitting from a flight to safety. The central bank may not make any changes to its monetary policy until next year as inflationary pressures at the moment remain subdued.

The British Pound pared Friday’s advance, and price action looks to have worked its way into the range of about 1.5486 – 1.5354. Indeed, the economic docket from the U.K. was quiet overnight, but the currency may face increased volatility this week as the central bank will release its key overnight lending rate, and asset purchase target for the month of September. As of late, traders are pricing in a four percent chance that the Bank of England will hike rates twenty five basis points at its meeting on September 9, 2010, according to the Credit Suisse Overnight index swaps. As policy makers are unlikely to begin raising borrowing costs until the recovery is secured, the meeting of the minutes on September 22nd will provide expectations for future growth. Meanwhile, board member Andrew Sentance will likely continue to dissent against the majority, calling for a rate hike. With high uncertainty regarding economic prospects in the near term, the split amongst the committee may widen in the coming months.

The greenback was mixed overnight against its major counterparts, and this jaded price action will likely continue going into the North American session as many traders in the U.S. are offline in observance of the Labor Day holiday. This week, USD traders are faced with the Fed’s Beige Book, consumer credit, and the trade balance reports.

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To discuss this report contact Michael Wright, Currency Analyst: mwright@fxcm.com

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