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Will the Euro, British Pound Extend Gains Against the US Dollar? (Euro Open)

Monday, 08 December 2008 06:16:00 GMT  |  Ilya Spivak, Currency Analyst

The US Dollar was under pressure in overnight trading as the Euro and the British Pound opened the trading week on a high note, extending gains from Friday’s rally. Traders sold the greenback as capital poured out of safe haven assets, sending Asian stock exchanges sharply higher. Japan saw the Current Account surplus shrink as exports fell the most in 7 years while the Eco Watchers survey printed at the worst on record.

Key Overnight Developments

• Japan's Current Account Surplus Shrinks as Exports Fall Most in 7 Years
• Eco Watchers Survey Shows Worst Merchant Sentiment on Record as Jobs Evaporate


Critical Levels 



The Euro pushed higher in overnight trading, extending momentum from last Friday to go in for a test of the 1.28 mark. The British Pound followed the single currency to rally against the US Dollar, racing past the 1.48 level. Technical positioning points to the likelihood of a bullish correction in EURUSD and GBPUSD in the near term before broad bearish trends regain momentum.


Asia Session Highlights 



Japan’s Current Account Balance saw the surplus shrink for the eighth consecutive month in October, dropping 56.5% from a year before to print at 960.5 billion yen. The decline comes as global economic slowdown trims the demand for Japanese goods. Exports fell 7.3% in the year through October, the largest drop in nearly 7 years. The external sector has been Japan’s primary engine of growth in recent years and its continued stagnation does not bode well for the world’s second-largest economy as it battles to rise from the first technical recession since 2001. Attempting to revive the exports growth may be one of the few options still in play for policymakers: monetary easing has little scope with rates already at just 0.30% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. This could lead the way for a return to currency market intervention to suppress the yen, making Japanese exports cheaper in hopes of stoking overseas buyers.

The Eco Watchers Survey saw Japanese merchant sentiment fall to the lowest level ever recorded since the metric’s inception in 2001. As we had suggested in the Forex Trading Weekly Forecast, acute deterioration in the labor market accounted for the decline as the employment component of the metric plunged -19.9% in November from the preceding month.

The US Dollar was under heavy selling pressure as capital poured out of safe haven assets and pushed Asian stocks sharply higher. US equity index futures point to further loses for the Dollar, showing gains of over 2% ahead of the European markets’ open.

Related Articles: Japanese Yen Threatened by Year-End Capital Flows


Euro Session: What to Expect



The UK Producer Price Index report is set to fall for the fourth consecutive month in November, shedding -0.6% to bring the annualized growth rate to an 11-month low at 5.2%. This will mean that the pace of PPI growth slowed a staggering 47% in just four months having peaked with commodities in July. Falling production costs are expected to be passed on (at least in part) to consumers by way of a lower price for the final good, slowing consumer inflation and giving the Bank of England room to continue cutting interest rates. The BOE cut borrowing costs by a full percentage point last week and is expected to offer another 25-50 basis points in easing at the next monetary policy meeting on January 7, 2009.

German Industrial Production is expected to continue to feel the brunt of cooling global demand, falling -2.7% in the year through October, the most in over 6 years. Industrial output is an important part of the Euro Zone’s largest economy, contributing over 30% to overall growth. Last week saw factory orders shrink a whopping -17.3% in the same period as sluggish performance around the world eats into overseas demand for German manufactured goods, the top export area. With global growth continuing to cool, the troubled sector may find a bit of support if currency depreciation continues to make German goods relatively cheap for overseas buyers. DailyFX Chief Strategist Antonio Sousa expects the Euro to continue to lose value through 2009.

Related Articles: Pound Threatens Six Year Lows As UK Recession Paces Global Decline; Euro May Remain Range Bound As Rate Cut Fails To Spark Volatility


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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