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Euro, British Pound Slump as Investors Scale Back on Risk Appetite

Euro, British Pound Slump as Investors Scale Back on Risk Appetite

2010-03-09 11:56:00
David Song, Currency Strategist

Talking Points
•    Japanese Yen: Benefits From Risk Aversion
•    Pound: Trade Deficit Unexpectedly Widens in January
•    Euro: ECB’s Axel Weber Sees Subdued Recovery
•    U.S. Dollar: NFIB Small Business Optimism on Tap

Euro, British Pound Slump as Investors Scale Back on Risk Appetite

The British Pound extended the previous day’s decline to reach a fresh weekly low of 1.4938 during the European trade as Fitch Ratings held a cautious outlook for the U.K. economy, and the currency may continue to trend lower going into the U.S. session as investors curb their appetite for risk. Fitch said that the current fiscal adjustment in Great Britain is “too slow,” and noted that the sovereign credit profit for the country has deteriorated “pretty sharply” as the economic outlook is “quite uncertain.”

Meanwhile, Bank of England policy maker Kate Barker said that the economic recovery in the U.K. is “broadly on track” during her final speech as a member of the MPC, but expects to see a “bumpy” road ahead as households continue to face fading demands for employment paired with tightening credit conditions. At the same time, Ms. Barker noted that “the severe downside risks have diminished” given the extraordinary taken on by the government, but saw scope for inflation to “be a little below target at the two-year horizon.” Nevertheless, the economic docket showed the RICS house price balance index increase 17% in February after rising a revised 31% in the previous month, which fell short of expectations for a 30% rise, while the trade deficit for the U.K. unexpectedly widened to GBP -7.987B in January from a revised GBP -7.010B to mark the highest reading since August 2008. Moreover, a report by the British Retail Consortium showed retail sales increased 4.5% in February after rising 1.2% in the month prior, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.

The Euro pared the previous day’s decline and slipped to a low of 1.3552 overnight as Fitch held a cautious outlook for the region, and fears of a protracted recovery may continue to weigh on the exchange rate as policy makers expect to see an uneven recovery this year. Bundesbank President Axel Weber said that the rebound in economic growth remains subdued and expects price pressures to remain weak during a press conference in Frankfurt, and went onto say the recovery in Europe’s largest economy remains “essentially intact” as the central bank aims to balance the risks for growth and inflation. Meanwhile, Fitch Rating does not expect any of the countries operating under the single-currency to withdraw from the fixed-exchange rate system as there remains good incentives to remain within the group, and went onto say that the risk for Greece to default on their obligations is “very low.”

The U.S. dollar strengthened against most of its major counterparts overnight, while the USD/JPY crossed back below the 20-Day (89.97) and slipped to a low of 89.62 following a rise in risk aversion. As equity futures foreshadow a lower open for the U.S. market, the slump in risk appetite is likely to drive greenback higher going into the North American trade as the economic docket for Tuesday remains fairly light. The NFIB small business optimism is expected to increase to 90.0 in February, which would be the highest reading since September 2008, while the IBD/TIPP gauge for economic optimism is anticipated to advance to 47.0 in March from 46.8 in the previous month as the recovery gathers momentum.

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Forex Weekly Trading Forecast - 03.08.10

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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