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Forex: Euro Bounces Back As Policy Makers Prepare For Bailout, Shows Muted Reaction To 3Q GDP

By , Currency Analyst
12 November 2010 12:30 GMT

Talking Points

  • Japanese Yen: Weakens Across the Board
  • British Pound: Maintains Upward Trend From May
  • Euro: 3Q GDP Falls Short of Expectations
  • U.S. Dollar: U. of Michigan Confidence Survey on Tap

The Euro showed little reaction to the weaker-than-expected 3Q GDP reading as the exchange rate rallied to a high of 1.3745, and the single-currency may continue to push higher going into the end of the week as European policy makers stand ready to bailout Ireland. During the G20 Summit in South Korea, German Chancellor Angela Merkel said “preparations are in place” to aid members of the European Union as the governments in the region struggle to manage their public finances, while a spokesman for Ms. Merkel announced that a joint statement will be issued later today as fears surrounding the European debt crisis intensifies. At the same time, the EU released a statement saying that Ireland has yet to request, but speculation for a bailout may intensify over the near-term as global investors see a risk of Ireland defaulting on its obligations.

As European policy makers try to restore investor confidence, the EUR/USD may stay afloat throughout the day as price action holds above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, but a shift in market sentiment could drag on the exchange rate as risk trends continue to dictate price action in the currency market. Nevertheless, economic activity in the Euro-Zone increased 0.4% in the third quarter amid forecasts for a 0.5% expansion in GDP, while the growth rate rose at an annualized pace of 1.9% for the second consecutive quarter. A separate report showed industrial outputs in the region unexpectedly slipped 0.9% in September, and the slew of dismal data could lead the European Central Bank to maintain the expansion in monetary policy throughout the beginning of 2011 as the recovery tapers off. As the ECB aims to encourage a sustainable recovery, the instability in the financial system paired with the ongoing weakness in the private sector could lead the Governing Council to keep its exit strategy on hold, and speculation surrounding the outlook for future policy is likely to play an increased role in driving price action for the euro as we head into the end of the year.

The British Pound bounced back from a low of 1.5985 during the European trade to maintain the upward trend from May, and the exchange rate may push higher going into the following week as investors expect the Bank of England to maintain its current policy throughout the remainder of the year. As the BoE is scheduled to release its policy meeting on November 17, comments from the central bank is likely to spark increased volatility in the exchange rate, but market participants may show little reaction to the statement as the BoE dropped to dovish tone during the quarterly inflation report earlier this week. Nevertheless, we expect to see a 7-1-1 vote count as MPC board member Andrew Sentance pushes for a 25bp rate hike while Adam Posen sees scope to expand monetary policy further, but there could be a growing split within the central bank as policy makers expect inflation to hold above target throughout 2011. If additional members of the MPC join Mr. Sentance and vote to start normalizing monetary policy, a rise in interest rate expectations could lead the recent rally in the GBP/USD to gather pace, which should lead the exchange rate to make another run at 1.6300.

U.S. dollar price action was mixed overnight, with the USD/JPY halting the three-day advanced, and risk developments could dictate price action throughout the North American trade as the economic docket remains fairly light for Friday. Nevertheless, the U. of Michigan consumer confidence survey due out at 14:55 GMT is expected to show a rebound in household sentiment as market participants forecast the index to increase to 69.0 in November from 67.7 in the previous month, and the data could spark a bullish reaction in the greenback as the outlook for future growth improves. However, as market sentiment continues to dictate price action in the foreign exchange market, the data could fuel a rise in risk appetite and ultimately lead to U.S. dollar weakness as investors move into higher-yielding currencies.

Will the EUR/USD Retrace The Advance From September As European Debt Woes Resurface? Join us in the Forum

Related Articles: Weekly Trading Forecast - 11.08.10

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

14:55

09:55

U. of Michigan Confidence (NOV)

69.0

67.7

Currency

GMT

Release

Expected

Actual

Comments

GBP

00:01

Nationwide Consumer Confidence OCT

53

52

Continues downward trend

NZD

02:00

Non-resident Bond Holdings OCT

--

64.6%

Highest level in a year

EUR

06:00

French GDP (QoQ) (3Q)

0.5%

0.4%

6th straight expansion

EUR

07:00

German GDP (QoQ) (3Q)

08%

0.7%

Slips back from multi-decade high

EUR

07:00

German GDP (YoY) n.s.a (3Q)

3.7%

3.9%

3rd straight quarterly expansion

EUR

07:00

German GDP (YoY) w.d.a (3Q)

3.7%

3.9%

EUR

09:00

Italian GDP (QoQ) (3Q)

0.4%

0.2%

Slowest expansion since contracting in Q4 ‘09

EUR

09:00

Italian GDP (YoY) (3Q)

1.2%

1.0%

3rd straight expansion after 7 straight contractions

EUR

10:00

Euro-Zone GDP (QoQ) (3Q)

0.5%

0.4%

Expands for five straight quarters.

EUR

10:00

Euro-Zone GDP (YoY) (3Q)

1.9%

1.9%

Growth rate holds steady for second quarter.

EUR

10:00

Euro-Zone Industrial Production (MoM) (SEP)

0.2%

-0.9%

Contracts for the first time since June.

EUR

10:00

Euro-Zone Industrial Production (YoY) (SEP)

7.1%

5.2%

Slowest pace of growth since February.

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12 November 2010 12:30 GMT