Talking Points

·         Japanese Yen: Under Pressure As Risk Appetite Gains

·         Pound: Reaches Nine Day High Ahead of BoE Rate Decision

·         Euro: Investor Confidence, German Factor Orders Rise

·         US Dollar: Labor Dollar Holiday Should Bring Low Volumes

Euro, Pound Gain As Dollar Pressured By Risk Appetite and China Diversification Talk

The euro built upon Friday’s gains as it reached an intra-day high of 1.4364 as it continues to be supported by a return of risk appetite. Indeed,  stocks rose for a third day globally as investors concerns were eased after the G-20 pledged to shore up the financial system and refrain from beginning an exit strategy from their liquidity providing efforts. Meanwhile, fundamental data from the Euro-Zone continues to point toward a recovery with investor confidence rising to a twelve month high according to the Sentix gauge. Additionally, German factory orders in July rose for a fifth straight month by 3.5% led by an increase in intermediate goods.

Improving activity and surging confidence has helped Europe’s largest economy bring an end to its recession, but the level of growth going forward remains highly uncertain. This has kept the ECB on hold and led to their recent dovish remarks from President Trichet that an exit strategy may not include raising interest rates. Policy markers are concerned that retrenched concerns will limit growth beyond government stimulus. Indeed, we saw in the German Factory orders report that despite its gains, there was a 1.5% decline in consumer goods. Therefore, 1.4400/50 remains a key level for the EURUSD as it has held as resistance and with interest rate expectations declining it could remain formidable. We have see overnight index swaps in the past week fall from expectations of a 62 bps in rate hikes to 45 bps over the next twelve months.

The British pound reached a nine day high of 1.6446 against the dollar as it advanced for a fourth straight day. However, the pair ran into resistance at the 50-Day SMA at 1.6442. The technical level had served as a source of support before recent sterling weakness on the back of the additional quantitative easing efforts of the BoE. We could now see it become a level of resistance especially ahead of the central bank’s next policy meeting on Thursday. The looming event risk could limit potential volatility for the pair due to the uncertainty surrounding the outcome. There is potential for the central bank to continue their liquidity efforts which would be a bearish sign for the U.K. economy and could lead to pound weakness.

The U.S. dollar has come under pressure on the back of demand for risky assets and talk of China looking diversifies its reserves. The pledge from the G-20 to shore up the global financial system has helped buoy Asian and European equity markets. We have continued to see traders demand for risky assets remain strong despite lingering concerns that once government stimulus dissipates economic growth could stall without consumers and business returning to normal spending patterns. The talk from China’s disappointment with U.S. policy of printing money is a theme to watch going forward and could be a weighing factor if market participants believe that it is more than talk from the largest buyer of U.S. debt. An empty calendar and the U.S. Labor Day holiday should see volume come to a crawl and most pairs begin to consolidate.

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

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Forex Weekly Trading Forecast - 09.07.09

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com