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Mixed U.S. Dollar Price Action To Carry Into North American Trade, Japanese Yen Weighed By Risk Appetite

Mixed U.S. Dollar Price Action To Carry Into North American Trade, Japanese Yen Weighed By Risk Appetite

2010-07-19 11:48:00
David Song, Currency Strategist

Talking Points
•    Japanese Yen: Loses Ground Against The Majors
•    Pound: U.K. Home Prices Fall For First Time This Year
•    Euro: Bundesbank Sees Robust 2Q Growth
•    U.S. Dollar: Risk Sentiment To Dictate Price Action on Light Economic Calendar

Meanwhile, the Bundesbank held an improved outlook in its monthly report and said “the pace of expansion noticeable improved” in the second quarter as “dynamic global growth remained the main driver for the German economy.”

In addition, the German central bank talked down speculation for a double-dip recession and expects GDP to expand at an annual pace of 1.9% this year, but went onto say that the budget deficits within the euro-region remains a “source of danger” as it weighs on the “implementation of a stability-oriented, single monetary policy significantly.” As the governments operating under the fixed-exchange rate system struggle to balance their public finances, the European Central Bank is likely to support the economy going forward, but the results of the commercial bank stress test due out later this week may lead the Governing Council to loosen policy further over the coming months in an effort to support the financial system. At the same time, Fitch Ratings increased it credit rating for Estonia to ‘A’ from “BBB+” as the country looks to join the Euro-Zone in January, and held a stable outlook for the nation as the entry to the single-currency “reduces risks associated with the country’s sizeable external debt and foreign currency lending in the domestic banking system.” Meanwhile, the economic docket showed the current account deficit for the Euro-Zone widened to a seasonally adjust EUR 5.8B in May from a revised EUR 5.6B in the previous month, while construction outputs slumped 1.0% during the same period after contracting 0.3% in April.

The British Pound extended the decline from the previous week and slipped to a low of 1.5259 during the European trade, and the GBP/USD appears to have a carved a near-term top as price action continues to hold below the 200-Day SMA at 1.5577. Meanwhile, Moody’s Investor Services downgraded its credit rating for Ireland to Aa2 from Aa1 following a “significant loss of financial strength” in the region, but held a “stable” outlook for the nation as the government takes unprecedented steps to address the budget deficit. Meanwhile, Bank of England board member Andrew Sentance maintained a hawkish bias for monetary policy during an interview with the BBC Radio and said that a “gradual” rise in the interest rate will certainly help to temper the risks for inflation, and went onto say that the central bank will have to take the appropriate steps “to support the recovery” as households continue to face tightening credit conditions paired with the deterioration in the labor market. Nevertheless, a survey by Rightmove Plc showed home in the U.K. slipped 0.6% in July to mark the first decline this year, while the annualized rate increased 3.7% from the previous year after expanding 5.0% in June, which is the slowest pace of growth since December.

U.S. dollar price action was mixed overnight, with the USD/JPY paring the previous week’s decline to reach a high of 87.21, and risk trends are likely to drive price action going into the North American session as the economic docket remains fairly light for the beginning of this week. Equity futures are foreshadowing a higher open for the U.S. market following the sharp decline on Friday, and the rebound in risk appetite could weigh on the exchange rate as investors unwind their safe-haven flows, but a drop in market sentiment would certainly spark another flight to safety, which could produce a bullish breakout in the greenback. 

How Will The European Bank Stress Test Affect The Exchange Rate? Join us in the Forum

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Forex Weekly Trading Forecast - 07.19.10

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


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