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Euro, British Pound Pare Previous Week’s Advance on U.S. Dollar Strength

Euro, British Pound Pare Previous Week’s Advance on U.S. Dollar Strength

2010-03-15 10:49:00
David Song, Currency Strategist

Talking Points
•    Japanese Yen: Mixed Amongst the Majors
•    Pound: BoE’s Barker Holds Dovish Outlook
•    Euro: EZ 4Q Employment Falters
•    U.S. Dollar: Empire Manufacturing, Industrial Production on Tap

Euro, British Pound Pare Previous Week’s Advance on U.S. Dollar Strength

Meanwhile, Bundesbank spokeswoman said that “neither the federal government nor the European Central Bank would have an access right” to its gold reserves, and argued that the proposals for a European Monetary Fund “would meet the Bundesbank’s firm resistance if they were confirmed.”

At the same time, European Central Bank board member Ewald Nowotny encouraged the economies operating under the single-currency to start consolidating their debts over the following year as he sees a risk for a “debt spiral,” which would make balancing the budget “costlier and more painful,” and went on to say that it is in Greece’s interest to stay within the Euro-Zone. Nevertheless, the economic docket showed employment slipped 0.2% in the fourth-quarter after contracting 0.5% in the previous month, led by a 1.1% drop in manufacturing payrolls. As policy makers expect to see a moderate recovery this year, with governments taking unprecedented steps to bring their public finances back in-line with EU standards, the Governing Council is likely to maintain a cautious outlook for the region and may keep borrowing costs on hold throughout the second-half of the year as they aim to balance the risks for growth and inflation.

The British Pound pared Friday’s rally, with the exchange rate slipping to a low of 1.5030 during the European trade, and the lack of momentum to cross back above the 20-Day SMA at 1.5239 may keep the GBP/USD within a narrow range over the week as investors weigh the outlook for future policy. Bank of England board member Kate Barker held a dovish tone during an interview with the Western Morning News and sees a possibility for “a quarter when GDP falls” as the private sector remains weak. She argued that the central bank does not expect a “double dip” as the expansion in monetary and fiscal policy continues to feed through the real economy, and said she would be certainly “surprised” if the economy slipped back into a recession. As a result, Ms. Barker expects the “recovery will be bumpy and fragile,” and sees a risk for a “protracted period where credit is more expensive while there is pain from the public finance side” as the economic outlook remains uncertain.

The greenback strengthened against most of its currency counterparts, with the USD/JPY advancing to a high of 90.79, and the reserve currency may continue to appreciate going into the North American trade as it benefits for the rise in safe-haven flows. Nevertheless, industrial outputs in the world’s largest economy are expected to hold flat in February after expanding 0.9% in the previous month, while the capacity utilization rate is anticipated to weaken to 72.5% from 72.6% in January. In addition, the Empire manufacturing index is forecasted to fall 22.00 in March from 24.91 in the previous month, while demands for U.S. financial assets are projected to increase $47.5B in January after rising $63.3B during the final month of 2009.

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Forex Weekly Trading Forecast - 03.15.10

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


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