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Forex: Euro Fundamentals Deteriorate Further, Sterling To Face BoE

By , Currency Analyst
09 November 2011 14:25 GMT

Talking Points

  • Euro: German Growth To Slow, ECB To Cut Rates Further
  • British Pound: Continues To Trade Below 200-Day SMA, BoE To Maintain Current Policy
  • U.S. Dollar: Rallies on Risk Aversion, Fed Chairman Bernanke On Tap

Euro: German Growth To Slow, ECB To Cut Rates Further

The Euro struggled to hold the range carried over from the previous week as it slipped to a low of 1.3579, and the single-currency may face additional headwinds over the remainder of the week as the fundamental outlook for Europe deteriorates. As the political shift in Italy and Greece comes under increased scrutiny, the heightening risk for contagion may continue to bear down on investor confidence, and the sharp reversal from 1.4199 may gather pace in the days ahead as the sovereign debt crisis pushes the economy back into a recession.

Indeed, an economic advisory panel to the German government lowered its outlook for the region and expects growth in Europe’s largest economy to slow to 0.9% in 2012 in light of the debt crisis, and sees the European Central Bank lowering the benchmark interest rate to 1.00% by the end of the year in order to stem the downside risks for the economy. According to Credit Suisse overnight index swaps, market participants are pricing a 40% chance for a 25bp rate cut at the next meeting on December 8, but the Governing Council may have little choice but to carry its easing cycle into the following year as the slowing recovery dampens the outlook for inflation. In turn, we may see the EUR/USD trade heavy going into the last days of 2011, and the bearish sentiment underlying the single-currency may gather pace over the coming months should we see the ECB continue to talk up speculation for additional monetary support.

British Pound: Continues To Trade Below 200-Day SMA, BoE To Maintain Current Policy

The British Pound maintained the range carried over from the previous week after it pared the overnight decline to 1.5929, and the sterling may continue to trend sideways over the next 24-hours of trading as the Bank of England interest rate decision comes into focus. Indeed, the BoE is widely expected to keep the benchmark interest rate at 0.50% while maintaining the GBP 275B target for its asset purchase program, and we may see market participants overlook the meeting should the central bank refrain from releasing a policy statement. In turn, the GBP/USD may face range-bound price action over the near-term, but the BoE’s quarterly inflation report on November 16 is likely to heavily influence the sterling as market participants weigh the outlook for future policy. The slowing recovery in the U.K. may lead the central bank to cast a dour outlook for the region, and we are likely to see the BoE take additional steps to stimulate the ailing economy in order to stem the risk of a double-dip recession. As interest rate expectations deteriorate, the near-term outlook for the sterling remains relatively weak, and the GBP/USD appears to have carved out a near-term top this month as the pair continues to trade below the 200-Day SMA at 1.6138.

U.S. Dollar: Rallies on Risk Aversion, Fed Chairman Bernanke On Tap

The U.S. dollar advanced against most of its major counterparts following the shift in market sentiment, and market participants may continue to scale back their appetite for risk as equity futures foreshadow a lower open for the U.S market. In turn, we should see the reserve currency continue to benefit from safe-haven flows, and risk trends should continue to dictate price action for the major currencies as the economic docket remains fairly light on Wednesday. However, comments from Fed Chairman Ben Bernanke may dampen the appeal of the USD should he talk up speculation for another round of quantitative easing, and we may see the central bank head turn increasingly cautious towards the world’s largest economy as the fundamental outlook for the region remains bleak.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:30

9:30

Fed Chairman Ben Bernanke Speaks on U.S. Economy

--

--

USD

15:00

10:00

Wholesale Inventories (SEP)

0.6%

0.4%

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (NOV 4)

500K

1826K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (NOV 4)

1000K

1356K

USD

15:30

10:30

DOE U.S. Distillate Inventory (NOV 4)

-2200K

-3575K

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Card Spending (MoM) (OCT)

0.6%

1.8%

Biggest advance since April.

NZD

21:45

Card Spending - Retail (MoM) (OCT)

0.7%

1.5%

NZD

23:00

QV House Prices (YoY) (OCT)

--

1.2%

Rises for third month.

AUD

23:30

Westpac Consumer Confidence (NOV)

--

6.3%

Improves for the third straight month.

AUD

23:30

Westpac Consumer Confidence Index (NOV)

--

103.4

JPY

23:50

Trade Balance - BOP Basis (Yen) (SEP)

351.7B

373.2B

Largest trade surplus since February.

JPY

23:50

Adjusted Current Account Total (Yen) (SEP)

963.2B

1186.6B

JPY

23:50

Current Account Balance (YoY) (SEP)

-31.3%

-21.4%

JPY

23:50

Current Account Total (Yen) (SEP)

1452.2B

1584.8B

JPY

23:50

Bank Lending Banks ex Trusts (OCT)

-0.2%

0.1%

Rises for the first time since November 2009.

JPY

23:50

Bank Lending Banks inc Trusts (YoY) (OCT)

-0.1%

0.0%

GBP

0:01

BRC Shop Price Index (YoY) (OCT)

--

2.1%

Slowest pace of growth since November 2010.

AUD

0:30

Home Loans (SEP)

1.5%

2.2%

Increases for the sixth consecutive month.

AUD

0:30

Investment Lending (SEP)

--

1.9%

AUD

0:30

Value of Loans (MoM) (SEP)

--

0.7%

CNY

2:00

Consumer Price Index (YoY) (OCT)

5.5%

5.5%

Slowest pace of growth since May.

CNY

2:00

Producer Price Index (YoY) (OCT)

5.8%

5.0%

Lowest since October 2010.

JPY

4:30

Bankruptcies (YoY) (OCT)

--

-14.1%

Largest decline since August 2010.

JPY

5:00

Eco Watchers Survey: Outlook (OCT)

--

45.9

Outlook falls to the lowest level since May.

JPY

5:00

Eco Watchers Survey: Current (OCT)

46.5

45.9

EUR

7:30

Bank of France Business Sentiment (OCT)

96

96

Lowest since September 2009.

EUR

7:45

French Central Government Balance (euros) (SEP)

-101.0B

-92.7B

GBP

9:30

Visible Trade Balance (Pounds) (SEP)

-8.000B

-9.814B

Largest trade deficit since December 2010.

GBP

9:30

Trade Balance Non EU (Pounds) (SEP)

-4.950B

-5.715B

GBP

9:30

Total Trade Balance (Pounds) (SEP)

-2.100B

-3.940B

USD

12:00

MBA Mortgage Applications (NOV 4)

--

10.3%

Rises for third week.

CAD

13:30

New Housing Price Index (MoM) (SEP)

0.1%

0.2%

Increases for the sixth month.

CAD

13:30

New Housing Price Index (YoY) (SEP)

2.2%

2.3%

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09 November 2011 14:25 GMT