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Euro Holds Narrow Range, British Pound Extends Decline as U.K. Manufacturing Falters

Euro Holds Narrow Range, British Pound Extends Decline as U.K. Manufacturing Falters

2010-03-10 11:41:00
David Song, Currency Strategist
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Talking Points
•    Japanese Yen: Losing Ground Across the Board
•    Pound: Industrial Outputs, Manufacturing Weakens in January
•    Euro: German Trade Surplus Narrows More-Than-Expected
•    U.S. Dollar: Monthly Budget Statement, Wholesale Inventories on Tap

Euro Holds Narrow Range, British Pound Extends Decline as U.K. Manufacturing Falters


The Euro tipped lower against the greenback on Wednesday, with the exchange rate slipping to a low of 1.3545 during the overnight trade, and the single-currency is likely to maintain the narrow range carried over from the previous week as policy makers in Europe aim to support the economies operating under the fixed-exchange rate system. Meanwhile, European Central Bank board member Jose Manuel Gonzalez-Paramo said the Governing Council “will say something about the third quarter” in June during an interview with the Expansion newspaper, and went onto say that normalizing policy “will be a gradual process” as the central bank aims to balance the risks for growth and inflation.

Nevertheless, the economic docket showed Germany’s trade surplus narrowed to EUR 8.0B in January from a revised EUR 13.4B in the previous month, led by a 6.3% drop in exports, while the current account slipped to EUR 3.6B from EUR 19.9B in December. At the same time, the final CPI report showed price pressures increased 0.4% in February amid an initial forecast for a 0.2% rise in inflation, while the annualized rate increased 0.6% after rising 0.8% during the month prior. As price growth remains subdued, the ECB likely to maintain a neutral policy stance going into the second-half of 2010, and dovish comments from the Governing Council would certainly lead investors to scale back expectations for a rate hike as policy makers expect to see an uneven recovery this year.

The British Pound pared the previous day’s advance and slipped to a low of 1.4872 as the slew of overnight data reinforced a weakened outlook for Great Britain, and the exchange rate looks poised to test the yearly low at 1.4782 as the GBP/USD maintains the downward trend carried over from the previous month. Industrial outputs in the U.K. unexpectedly slipped 0.4% in January after rising 0.5% in the previous month to mark the first decline since August, while manufacturing weakened 0.9% amid forecast for a 0.2% expansion. As policy makers continue to see a risk for a protracted recovery, the Bank of England is likely to hold a dovish outlook for future policy, and speculation for further easing would certainly weigh on the exchange rate going forward. Meanwhile BoE’s Adam Posen said that the central bank expects “growth will pick up from here” during an interview with Sky News, and noted that the MPC stands ready to take the appropriate steps “if something negative happens to the economy again.”

U.S. dollar price action was mixed overnight, with the USD/JPY retracing the decline from earlier this week to reach a high of 90.47, and the lack of clear direction could leave the greenback range-bound going into the North American trade as equity future reflect a neutral bias for the U.S. open. Nevertheless, the monthly budget report is expected to show a $222.0B deficit in February following the $193.9B shortfall in the previous month, while wholesale inventories are projected to increase 0.2% in January after contracting 0.8% in the previous month. The data could stoke increase volatility in the greenback as investors weigh the prospects for a sustainable recovery in U.S., and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy.


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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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