Japanese Yen Continues to Outperform, British Pound Lags Behind

The Japanese Yen continued to benefit from the rise in risk aversion and remains the only major currency that’s higher against the greenback on Tuesday, and the USD/JPY may trend lower throughout the North American trade as market participants curb their appetite for higher risk/reward investments. The dollar-yen tumbled to a low of 88.18 after moving nearly 116% of its average true range, and remains 100pips lower from the open to hold along the 240-SMA at 88.42. However, as the 30-minute RSI bounces back from oversold territory, we may see the pair cross back above the 20-Day SMA (88.53) during the U.S. trade as the two-day decline stalls ahead of the 10-Day at 87.77. Nevertheless, the final 3Q GDP reading for Japan is likely to reinforce a weakened outlook for future growth as economists project the growth rate to get revised down to an annualized pace of 2.8% from an initial forecast for a 4.8% expansion, and mounting growth fears may continue to drag on market sentiment as policy makers see a risk for a protracted recovery.

The British Pound  is the worst performing currency against the greenback on Tuesday as the exchange rate tumbled to a low of 1.6256 however, as the GBP/USD maintains the broad range from November, we may see the pair continue to trend sideways ahead of the Bank of England interest rate decision on Thursday as investors weigh the outlook for future policy. The GBP/USD has moved nearly 117% of its ATR and remains roughly 150pips lower from the open as Moody’s Investor Services held a cautious outlook for the U.K.’s credit rating, and fears of a protracted recovery may lead investors to scale back expectations for a rate hike in 2010 as the BoE pledges to support the ailing economy. Nevertheless, as the RSI climbs back from oversold, we may see the GBP/USD trend higher ahead of the Asian trade and cover the gap from the 100-SMA at 1.6424, but the slew of data scheduled for Wednesday is likely to stoke increased volatility in the British Pound cross rates as market participants weigh the prospects for a sustainable recovery in the U.K.

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