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Euro Extends Advance on EUR 750B Rescue Package, British Pound Halts Six-Day Decline

Euro Extends Advance on EUR 750B Rescue Package, British Pound Halts Six-Day Decline

2010-05-10 11:49:00
David Song, Currency Strategist
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Talking Points
•    Japanese Yen: Weighed By Risk Appetite
•    Pound: Bank of England Maintains Current Policy 
•    Euro: Investor Confidence Weakens More-Than-Expected
•    U.S. Dollar: Equity Futures Point to Sharp Rally

At the same time, the European Central Bank announced that it will intervene in the market for government and private bonds in order “to ensure depth and liquidity in those market segments which are dysfunctional,” while the Bundesbank said it will start purchasing government bonds today.

According to the details of the aid plan, governments in Europe will make EUR 440B available for the ailing economies, with an additional EUR 60B coming from the European Union’s budget, while the International Monetary Fund will provide as much as EUR 250B in funding as government officials struggle to bring their public finances back in-line with the stability pact. In addition, the Federal Reserve announced that it will reinstate its currency-swap lines with its major counterparts as the Greek crisis weighs on the global financial system, and said that it will provide the “full allotment” of U.S. dollars through January 2011. Nevertheless, the economic docket showed Germany’s trade surplus widened to EUR 17.2B in March from a revised EUR 12.7B in the previous month to top forecasts for a rise to EUR 14.0B, led by a 10.7% jump in exports, while the Sentix investor confidence survey for the Euro-Zone weakened more-than-expected in May, with the index slipping to -6.4 from 2.5 in April. As global policy makers take unprecedented steps to support the financial system, the efforts should help to alleviate the downward pressures on market sentiment however, the new measures may only provide a short-term relief as the ECB expects to see an uneven recovery this year.

The British Pound halted the six-day decline and advanced to a high of 1.5029 following the Bank of England interest rate decision as the central bank held the benchmark interest rate at 0.50% and maintained its asset purchase target at GBP 200B. Nevertheless, the BoE is scheduled to release its Quarterly Inflation Report this on Wednesday at 9:30 GMT, and a shift in the central bank’s economic assessment is likely to spark increased volatility in the exchange rate as investors weigh the prospects for future policy. Government officials in the U.K. may highlight the stickiness in consumer prices as inflation exceeded the central bank’s upper limit of 3% for the second-time this year, and the British Pound may push higher over the week if BoE Governor Mervyn King no longer expects price pressures to drop below the 2% and drops his highly dovish bias for price growth.

The greenback weakened against most of its currency counterparts as investors raised their appetite for risk, while the USD/JPY extended the rally from Friday to reach a high of 93.50. As the economic docket for the U.S. remains fairly light, the dollar is likely to underperform going into the North American session as equity futures foreshadow a big rally in the U.S, led by a 4.7% rise in the S&P500

Will Fears of Contagion Continue to Weigh on the EUR/USD? Join us in the Forum

Related Articles: 

Forex Weekly Trading Forecast - 05.10.10


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

FX Upcoming

Currency
GMT
EST Release Expected Prior
CAD 12:15 8:15 Housing Starts (APR) 200.0K 197.3K
NZD 22:45 18:45 NZ Card Spending (MoM) (APR) -- 2.1%
GBP 23:01 19:01 RICS House Price Balance (APR) 9% 9%
GBP 23:01 19:01 BRC Retail Sales Monitor (APR) -- 6.6%

 

 Currency  GMT  Release  EST Actual Comments
 NZD  12:00  QV House Prices (YoY) (APR)  --  6.1%  Holds same pace of growth from March.
 AUD  1:30  NAB Business Confidence (APR)  --  13  Drop in business sentiment suggests firms may scale back on hiring.
 AUD  1:30  NAB Business Conditions (APR)  --  8
 AUD  1:30  ANZ Job Advertisements (MoM) (APR)  --  -1.2%
 EUR  6:00  German Trade Balance (euros) (MAR)  14.0B  17.2B Surplus widens more-than-expected as exports rise the most since 1990.
 EUR  6:00  German Current Account (euros) (MAR)  13.5B  18.0B
 EUR  6:00  German Imports s.a. (MoM) (MAR)  0.5%  11.0%
 EUR  6:00  German Exports s.a. (MoM) (MAR)  3.0%  10.7%
 EUR  6:30  Bank of France Business Sentiment (APR) 104 102 Production accelerates as economic recovery gathers pace.
UR  6:45  French Industrial Production (MoM) (MAR)  0.3%  1.0%
 EUR  6:45  French Industrial Production (YoY) (MAR)  5.2%  6.2%
 EUR  6:45  French Manufacturing Production (MoM) (MAR)  0.5%  0.8%
 EUR  6:45  French Manufacturing Production (YoY) (MAR)  6.4%  6.7%
 EUR  6:45  Italian Industrial Production s.a. (MoM) (MAR)  1.0%  -0.1%  Unexpectedly weakens, weighing on the outlook for future growth.
EUR  8:00  Italian Industrial Production w.d.a. (YoY) (MAR)  8.1%  6.4%
 EUR  8:00  Italian Industrial Production n.s.a. (YoY) (MAR)  10.8%  8.7%
 EUR  8:30   Euro-Zone Sentix Investor Confidence (MAY)  -1.0  -6.4 Falls back into negative territory.
 GBP 11:00  Bank of England Interest Rate Decision  0.50%  0.50% Maintains current policy, quarterly inflation report ahead.
GBP 11:00  Bank of England Asset Purchase Target 200B 200B

 

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