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Forex: Euro To Face Increased Headwinds As ECB Maintains Current Policy, U.S. Dollar To Benefit As Market Sentiment Falters

By , Currency Analyst
02 December 2010 12:30 GMT

Talking Points

  • Japanese Yen: Continues To Lose Ground As Risk Appetite Returns
  • British Pound: Construction Expands At Faster Pace in November
  • Euro: GDP Expands 0.4% in Third Quarter
  • U.S. Dollar: Pending Home Sales on Tap

The Euro pared the overnight advance as the European Central Bank talked down speculation for further easing, and the single-currency is likely to face increased headwinds over the near-term as the Governing Council refrains from addressing the risk for contagion. ECB President Trichet reiterated that monetary policy remain ‘appropriate’ during the press conference, and said inflation expectations remain firmly anchored as the central bank maintains its one and only mandate to ensure price stability. In addition, the central bank head noted that its exit strategy will be delayed as the governments operating under the fixed-exchange rate system struggle to manage their public finances, and went onto say that the uncertainties surrounding the economic outlook remains highly elevated as the financial system remains fragile.

As a result, Mr. Trichet said that the emergency measures will be an ‘ongoing’ program as the central bank aims to stem the risks for the region, but the lack of additional monetary easing could lead the bearish momentum behind the single-currency to gather pace throughout the remainder of the year as market participants speculate Spain and Portugal to share Ireland’s fate. Meanwhile, the preliminary GDP reading for the Euro-Zone showed economic activity expanded 0.4% in the third-quarter, which was largely in-line with expectations, while gross fixed capital formations held steady during the three-months through September amid projections for a 0.4% rise. A deeper look at the report showed household consumption increased 0.3% during the same period, which exceeded an initial forecast for a 0.2% rise in private spending, while government spending advanced 0.4% versus expectations for a 0.3% expansion. As the outlook for growth and inflation remains weak, the Governing Council could face increased pressures to take additional steps as the economic recovery in the Euro-Zone tapers off, and we expect the EUR/USD to completely retrace the advance from September as European policy makers struggle to restore investor confidence.

The British Pound fell back from a high of 1.5666 during the European trade to maintain the narrow range from earlier this week, and the GBP/USD may hold steady throughout the day as investors eagerly wait for the U.S. non-farm payrolls report due out tomorrow at 13:30 GMT. As the GBP/USD continues to trade below the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700, we are likely to see the pair continue to trend sideways throughout the North American trade, but a shift in market sentiment could spark increased volatility in the exchange rate as risk trends continue to dictate price action in the currency market. Nevertheless, the economic docket showed construction in U.K. unexpectedly expanded at a faster pace in November, with the PMI reading advancing to 51.8 from 51.6 in the previous month, and the Bank of England may see scope to start normalizing monetary policy in the beginning of 2011 as the recovery gradually gathers pace. Given the stickiness in price growth, the BoE may turn increasingly hawkish as they expect inflation to hold above target throughout the following year, and interest rate expectations may gather pace over the coming months as growth and inflation accelerates.

U.S. dollar price action was mixed overnight, with the USD/JPY holding within the previous day’s range, and the major currencies may hold steady ahead of the non-farm payrolls release due out tomorrow as market participants expect the U.S. labor market to improve for the second consecutive month in November. Nevertheless, pending home sales in the world’s largest economy is forecasted to contract 1.0% in October after slipping 1.8% on the previous month, and the data could weigh on market sentiment as it reinforces a weakened outlook for future growth. As the economic docket remains fairly light for Thursday, we expect risk trends to dictate price action throughout the North American trade, and the rebound in risk appetite may gather pace as equity futures foreshadow a higher open for the U.S. market.

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

Related Articles: Forex Weekly Trading Forecast - 11.29.10

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

13:30

08:30

Continuing Claims (NOV 20)

4200K

4182K

0.7%

USD

13:30

08:30

Initial Jobless Claims (NOV 27)

425K

407K

USD

15:00

10:00

Pending Home Sales (MoM) (OCT)

-1.0%

-1.8%

USD

15:00

10:00

Pending Home Sales (YoY) (OCT)

--

-24.9%

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Capital Spending (3Q)

6.0%

5.0%

Rises for the first time since 1Q 2007.

JPY

23:50

Capital Spending Ex. Software (3Q)

6.0%

4.8%

JPY

23:50

Monetary Base (YoY) (NOV)

--

7.6%

Fastest pace of growth since May 2009.

AUD

00:30

Retail Sales (MoM) (OCT)

0.4%

-1.1%

First decline since February.

AUD

00:30

Trade Balance (AUD) (OCT)

2000M

2625M

Highest since June.

EUR

06:30

French ILO Mainland Unemployment Rate (3Q)

9.4%

9.3%

Unchanged for 2nd month.

EUR

06:30

French ILO Unemployment Rate (3Q)

9.8%

9.7%

Remains near multi-year highs.

EUR

06:30

French Mainland Unemployment Change (3Q)

--

-1K

Drops after 2 rises.

CHF

06:45

GDP (QoQ) (3Q)

0.5%

0.7%

3rd straight slowdown.

CHF

06:45

GDP (YoY) (3Q)

3.1%

3.0%

Best since Q2 ’08.

CHF

08:15

Retail Sales (YoY) (OCT)

--

3.5%

Falls back from spike higher in Sept.

GBP

09:30

PMI Construction (NOV)

51.3

51.8

Bounces back after sharp dip in Oct.

EUR

10:00

Euro-Zone GDP (QoQ) (3Q)

0.4%

0.4%

Slips back after surging in Q2.

EUR

10:00

Euro-Zone GDP (YoY) (3Q)

1.9%

1.9%

3rd straight expansion.

EUR

10:00

Euro-zone Gross Fixed Capital (QoQ) (3Q)

0.4%

0.0%

Holds flat for first time since 4Q 2000.

EUR

10:00

Euro-zone Household Consumption (QoQ) (3Q)

0.2%

0.3%

Remains at fastest pace in years.

EUR

10:00

Euro-zone PPI (MoM) (OCT)

0.3%

0.4%

Fastest since April.

EUR

10:00

Euro-zone PPI (YoY) (OCT)

4.3%

4.4%

Fastest since Oct ’08.

EUR

10:00

Euro-zone Govt Expenditure (QoQ) (3Q)

0.3%

0.4%

3rd expansion since contacting in Q4 ’09.

EUR

12:45

ECB Rate Decision

1.00%

1.00%

Holds rate in order to stem downside risks for the region.

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02 December 2010 12:30 GMT