Talking Points

·         Japanese Yen: Democratic Party Wins Election

·         Pound: Tips Lower For Second Day

·         Euro: CPI Estimate Falls Less Than Expected in August

·         US Dollar: NAPM-Milwaukee, Chicago PMI on Tap

Euro Finds Intraday Support Head of 20-Day SMA, British Pound Looking For Bottom

The euro tipped lower for the second day but remained supported by the 20-Day moving average, and the EUR/USD may continue to trend sideways over the following month as investors weigh the outlook for future policy. At the same time, the economic docket for the Euro-Zone showed the CPI estimate declined less than expected in August after falling at a record pace during the previous month. The data reinforces a bullish outlook for the single-currency as the European Central Bank maintains it’s one and only mandate to ensure price stability, and the euro-dollar may continue its advance from the March lows as investors anticipate the central bank to tighten policy over the next 12 months.

A report by the European Union statistics office showed consumer prices fell at an annualized rate of 0.2% in August amid expectations for a 0.3% drop, and the data encourages an improved outlook for inflation as the region emerges from its worst recession since the post-war period. As inflation expectations remain well anchored, the European Central Bank is widely expected to hold the benchmark interest rate at 1.00% later this week and is likely to maintain its EUR 60B in covered bond purchases as the economic outlook remains uncertain. A Bloomberg News survey shows all of the 58 economists polled forecast the ECB to hold borrowing costs at the record-low on September 3^rd, and commentary following the rate decision is likely to spark volatility in the foreign exchange market as investors anticipate the central bank to raise the interest rate by more than 50bp over the following year.

Traders in the U.K. were offline in observance of the Summer Bank holiday however; the British pound remains under pressure and weakened for the second day to reach a low of 1.6184 during the Asian trade. As market participants scale back their appetite for risk, we may see the GBP/USD continue to retrace the advance from the previous month, and may fall towards last week’s low (1.6155) to test for short-term support. However, a break below this level should expose the 100-Day moving average at 1.6000, and the pair may continue to trend lower in September as investors lower their expectations for higher interest rates in the U.K.

The U.S. dollar advanced against its currency counterparts during the overnight as investors scaled back demands for high-yielding assets, and the greenback may continue to strengthen over the next few hours of trading as the equity futures foreshadows a lower open for the U.S. session. At the same time, the economic calendar is anticipated to reinforce an improved outlook for manufacturing as economists forecast the Chicago PMI to rise for the third consecutive month in August, while the Dallas Fed’s manufacturing activity index is expected to contract at a slower pace during the same period. Moreover, the NAPM-Milwaukee index is projected to rise to 49.0 from 45.0 in July, and the data is likely to encourage an enhanced outlook for future growth as policy makers anticipate economic activity to improve throughout the second-half of the year.

Will The EUR/USD Remain Above 1.4000? Join us in the Forurm

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