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Forex: British Pound Pares Advance As BoE Curbs Rate Expectations, Euro Holds Narrow Range

By , Currency Analyst
01 March 2011 13:30 GMT

Talking Points

  • British Pound: BoE King Talks Down Risk For Inflation
  • Euro: EU Raises Growth, Inflation Forecast
  • Canadian Dollar:Bank of Canada To Keep Rate On Hold
  • U.S. Dollar: ISM Manufacturing, Fed Chairman Bernanke Testimony on Tap

The British Pound fell back from a fresh yearly high of 1.6327 as the economic docket reinforced a mixed outlook for future growth, and the sterling may pare the advance from earlier this week as U.K. policy makers maintain a cautious tone for the region. Mortgage approvals in Britain increased 45.7K in January amid forecasts for a 42.9K rise, while consumer credit unexpectedly slipped GBP 0.2B during the same period after expanding a revised GBP 0.8B in the month prior. As private sector activity remains frail, the Bank of England may continue to support the real economy throughout the first-half of 2011, but there could be a growing shift within the MPC as the central bank struggles to balance the risks for the region.

BoE Governor Mervyn King talked down the risk for inflation and said that the central bank has yet to see “significant evidence of a pickup of medium-term inflation expectations” while testifying in front of Parliament. As the BoE expects price growth to fall back below the 2% in 2012, the central bank head pledged to carry out additional asset purchase if price growth slips below target, and went onto say that there’s a lot of dissenting views on when to raise borrowing costs as the region faces a choppy recovery. The comments from Mr. King suggest that we will continue to see a two-way split within the MPC as the economic outlook remains clouded with high uncertainty, and dovish comments from the central bank head may continue to bear down on the exchange rate as investors weigh the prospects for future policy. As the central bank talks down speculation for a rate hike, the GBP/USD may continue to lose ground during the North American trade, but demands for higher yields could spark a rebound in the exchange rate as risk sentiment continues to dictate price action in the currency market.

The Euro pared the overnight advance to hold within the previous day’s range, but the EUR/USD may regain its footing going into the North American trade as European policy makers raise their outlook for growth and inflation. The European Commission sees the economy expanding 1.6% this year amid an initial forecast for a 1.5% rise in the growth rate, while inflation is expected to average 2.2% in 2011 versus earlier projections for a 1.8% print. As the economic recovery in the euro-area gathers pace, the European Central Bank may see scope to reestablish its exit strategy later this year, and speculation for a rate hike should help to prop up the single-currency as the Governing Council adopts a hawkish outlook for future policy. In turn, the near-term rally in the EUR/USD may gather pace over the near-term, but the euro could face headwinds in the coming days if the EU fails to come up with a solid solution to address the sovereign debt crisis.

U.S. dollar price action was mixed on Tuesday, with the USD/JPY advancing to a fresh weekly high of 82.23, but the greenback may regain its footing during the North American trade as the economic docket is expected to reinforce an improved outlook for future growth. Manufacturing in the world’s largest economy is anticipated to expand at a faster pace in February, with market participants forecasting the ISM index to increase to 61.0 from 60.8 in the previous month, but comments from U.S. policy makers could produce choppy price action in the major currencies as Fed Chairman Ben Bernanke is scheduled to deliver his semiannual testimony in front of the Senate Banking Committee at 15:00 GMT. Mr. Bernanke is likely to maintain a cautious outlook for the economy given the ongoing weakness within the private sector, and the central bank head may continue to curb speculation for a rate hike later this year as Americans cope with the depressed housing market paired with high unemployment. Nevertheless, the Bank of Canada is widely expected to hold the benchmark interest rate at 1.00% in March in order to balance the risk for growth and inflation, and the central bank may retain its wait-and-see approach throughout the first-half of the year as it aims to encourage a sustainable recovery.

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

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

CAD

14:00

09:00

Bank of Canada Interest Rate Decision

1.00%

1.00%

USD

15:00

10:00

ISM Manufacturing (FEB)

60.5

60.8

USD

15:00

10:00

ISM Prices Paid (FEB)

81.5

81.5

USD

15:00

10:00

Construction Spending (MoM) (JAN)

-0.4%

-2.5%

Currency

GMT

Release

Expected

Actual

Comments

AUD

22:30

AiG Performance of Manufacturing Index (FEB)

--

51.1

Spikes higher to highest since Aug ‘10

JPY

23:30

Household Spending (YoY) (JAN)

-1.4%

-1.0%

4th straight contraction

JPY

23:30

Jobless Rate (JAN)

4.9%

4.9%

Unch. for second month at recent lows.

JPY

23:30

Job-to-Applicant Ratio (JAN)

0.58

0.61

Maintains rising trend

AUD

00:30

Current Account Balance (AUD) (4Q)

-7000M

-7299M

Continues to widen after narrowest in Q2 ‘10

AUD

00:30

Net Exports of GDP (4Q)

0.2%

0.0%

AUD

00:30

Retail Sales (MoM) (JAN)

--

0.4%

Strengthening trend continues

CNY

01:00

PMI Manufacturing (FEB)

52.1

52.2

Continues slowing trend

JPY

01:30

Labour Cash Earnings (YoY) (JAN)

0.3%

0.2%

Remains near weakest levels of 2010

NZD

02:00

ANZ Commodity Price (FEB)

--

2.7%

Continues to ease after peaking in Nov.

CNY

02:30

HSBC Manufacturing PMI (FEB)

52.5

51.7

Continues slowing trend

AUD

03:30

RBA Rate Decision MAR

4.75%

4.75%

Stands pat as inflation slows

JPY

05:00

Vehicle Sales (YoY (FEB)

--

-14.3%

6th straight contraction

AUD

05:30

RBA Commodity Index SDR (YoY) (FEB)

--

49.9%

Best since Sept. ‘10

AUD

05:30

RBA Commodity Price Index (AUD) (FEB)

--

101.9

Highest since Feb. ‘09

CHF

06:45

GDP (QoQ) (4Q)

0.5%

0.9%

Deluge of European data points to improving growth prospects. EZ PMI hits fastest pace in ten-years. German unemployment hits lowest levels since Sept 1992.

CHF

06:45

GDP (YoY) (4Q)

2.7%

3.1%

GBP

07:00

Nationwide House Prices (YoY) (FEB)

-0.2%

-0.1%

GBP

07:00

Nationwide House Prices (MoM) (FEB)

-0.2%

0.3%

CHF

08:30

SVME-PMI (FEB)

60.5

63.5

EUR

08:45

Italian PMI Manufacturing (FEB)

57.6

59.0

EUR

08:50

French PMI Manufacturing (FEB)

55.3

55.7

EUR

08:55

German PMI Manufacturing (FEB)

62.6

62.7

EUR

08:55

German Unemployment Rate (FEB)

7.4%

7.3%

EUR

08:55

German Unemployment Change (FEB)

-13K

-52K

EUR

09:00

Euro-zone PMI Manufacturing (FEB)

59.0

59.0

EUR

09:00

Italian Unemployment Rate (JAN)

8.6%

8.6%

GBP

09:30

M4 Money Supply (MoM) (JAN)

--

0.8%

Rebounds from record low in Dec.

GBP

09:30

M4 Money Supply (YoY) (JAN)

--

-1.7%

4th consecutive contraction

GBP

09:30

Mortgage Approvals (JAN)

42.5K

45.7K

Rebounds from dip lower in Dec.

GBP

09:30

Net Consumer Credit (JAN)

0.1B

-0.3B

Continues widely fluctuating trend

GBP

09:30

Net Lendign Sec. on Dwellings (JAN)

0.1B

1.8B

GBP

09:30

M4 Ex-OFCs 3M Annualized (JAN)

--

4.9%

Hits record high

GBP

09:30

PMI Manufacturing (FEB)

61.0

61.5

Remains at record high pace

EUR

10:00

Euro-zone CPI Estimate (YoY) (FEB)

2.4%

2.4%

Above target for third straight month

EUR

10:00

Euro-zone Unemployment Rate (JAN)

10.0%

9.9%

Drops after to lowest since March ‘10

EUR

10:00

Italian CPI (MOM) (FEB)

0.2%

0.3%

Rebounds from contaction in Jan.

EUR

10:00

Italian CPI (YoY) (FEB)

2.3%

2.4%

Returns to fastest pace since 2008

EUR

11:00

Italian Annual GDP (DED 31)

1.1%

1.3%

Expands after 2years in contraction

EUR

11:00

Italian Deficit to GDP (DED 31)

5.0%

4.6%

Falls back after hitting record high in 2009

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01 March 2011 13:30 GMT