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Forex: Euro Extends Advance As EU Looks At Alternative Measures, British Pound Rally To Gather Pace

Forex: Euro Extends Advance As EU Looks At Alternative Measures, British Pound Rally To Gather Pace

2011-02-01 13:30:00
David Song, Currency Strategist
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Talking Points

  • Japanese Yen: Weighed By Risk Appetite
  • British Pound: U.K. Manufacturing Expands At Record Pace
  • Euro: German Unemployment Slips To 18-Year Low
  • U.S. Dollar:ISM Manufacturing, Construction Spending on Tap

The Euro rallied to a high of 1.3774 on Tuesday as the economic docket reinforced an improved outlook for future growth, and the single-currency may push higher going into the North American trade as the EU looks at alternative measures to restore investor confidence. Unemployment in Germany weakened 13K in January amid forecasts for a 10K drop, while the jobless rate unexpectedly slipped to 7.4% from 7.5% in December to mark the lowest reading since November 1992. At the same time, manufacturing in the Euro-Zone expanded at a faster pace during the same period, with the PMI reading advancing to 57.3 from 57.1 in the previous month, and the recent developments may encourage the European Central Bank to reestablish its exit strategy later this year as the economic recovery gathers pace.

Nevertheless, according to an article on Bloomberg News, the EU is close to reaching an agreement to empower the European Financial Stability Facility with the ability to directly purchase government debt, and the group may look to take additional steps to stem the risk for contagion as the governments operating under the single-currency struggle to manage their public finances. However, the lackadaisical approach in addressing the debt crisis may continue to bear down on market sentiment, and the euro could face additional headwinds over the near-term if we see the EU fail to deliver a concrete solution. As the near-term rally in the EUR/USD fails to push the relative strength index above 70, we may see the exchange rate consolidate ahead of the EU Summit later this week, but the slew of market-moving data scheduled for the remainder of the week is likely to produce increased volatility across the major currencies as investors weigh the outlook for future growth.

The British Pound advanced to a fresh yearly high of 1.6141 despite the slew of mixed data out of the U.K., and the GBP/USD may continue to retrace the decline from back in November as investors speculate the Bank of England to gradually normalize monetary policy later this year. Mortgage approvals in the U.K. increased 42.6K in December to mark the slowest pace of growth since March 2009, while manufacturing expanded at a record pace in January, with the PMI reading advancing to 62.0 in January from a revised 58.7 in the previous month. As the recovery gradually gathers pace, the National Institute of Economic and Social Research expects the BoE to hike the benchmark interest rate three times this year, but there could be a growing split within the MPC as the tough austerity measures dampens the outlook for future growth. As the GBP/USD maintains the upward trend from earlier this month, the pair looks poised to test 1.6200-20, the 23.6% Fibonacci retracement from the 2009 low to high, but we may see the pair consolidate over the near-term if we see the daily RSI continue to hold below 70.

The greenback lost ground against all of its major counterparts on Tuesday, with the USD/JPY tumbling to a low of 81.46, but we may see the U.S. dollar recoup the overnight losses as manufacturing in the world’s largest economy is expected to expand at a faster pace in January. The ISM Manufacturing index is forecasted to increase to 58.0 from 57.0 in December, and businesses may continue to ramp up their rate of production this year as the rebound in economic activity picks up steam. However, as equity futures foreshadow a higher open for the U.S. market, the rise in risk appetite may dampen demands for the greenback, and the dollar may struggle to hold its ground as risk sentiment continues to dictate price action in the currency market.

Will the EUR/USD retrace the advance from September? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 01.31.11

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

15:00

10:00

ISM Manufacturing (JAN)

57.9

57

USD

15:00

10:00

Construction Spending (MoM) (DEC)

0.1%

0.4%

USD

15:00

10:00

ISM Prices Paid (JAN)

73.5

72.5

EUR

17:00

12:00

Italian New Car Registrations (YoY) (JAN)

--

-21.7%

EUR

18:00

13:00

Italian Budget Balance (euros) (JAN)

--

9.1B

EUR

18:00

13:00

Italian Budget Balances (euros) (YTD) (JAN)

--

-67.5B

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Average Hourly Earnings (QoQ) (4Q)

0.6%

0.6%

Remains at strongest levels in 2010

NZD

21:45

Labour Cost Private Sector (Qo)Q (4Q)

0.6%

0.6%

NZD

21:45

Private Wages ex-Overtime (QoQ) (4Q)

0.5%

0.6%

AUD

22:30

AiG PMI (JAN)

--

46.7

Climbs of multi-month low in Dec.

AUD

00:30

House Price Index (QoQ) (4Q)

-0.2%

0.7%

Bounces back from contraction in Q3

AUD

00:30

House Price Index (YoY) (4Q)

5.6%

5.8%

Slowest expansion since contracting in Q2 ‘09

AUD

00:30

NAB Business Confidence (DEC)

--

-3

Continues to fall after peaking in Aug.

AUD

00:30

NAB Business Conditions (DEC)

--

6

Continues recent uptrend

CNY

01:00

PMI Manufacturing (JAN)

53.5

52.9

Lowest since Aug ‘10

JPY

01:30

Labour Cash Earnings (YoY) (DEC)

1.0%

-0.4%

Continues recent weakening trend, slips into negative

NZD

02:00

ANZ Commodity Price (JAN)

--

3.8%

Climbs off 4-month low in Dec.

CNY

02:30

HSBC Manufacturing PMI (JAN)

--

54.5

Climbs off 3-month low in Dec.

AUD

03:30

RBA Interest Rate Decision

4.75%

4.75%

Stands pat for 2nd month

JPY

05:00

Vehicle Sales (YoY) (JAN)

--

-22.0%

5th straight contraction

AUD

05:30

RBA Commodity Index SDR (YoY) (JAN)

--

48.7%

Slips back from 3 month high

AUD

05:30

RBA Commodity Price Index (AUD) (JAN)

--

100.0

Best since Feb ‘09

GBP

07:00

Nationwide House Prices (MoM)

-0.4%

-0.1%

5th contraction in last 7

GBP

07:00

Nationwide House Price (YoY)

-1.0%

-1.1%

1st contraction since Aug. ‘09

EUR

07:45

Producer Prices (MoM) (DEC)

0.6%

1.0%

Accelerates at fastest pace since May ‘08

EUR

07:45

Producer Prices (YoY) (DEC)

5.0%

5.4%

Fastest since Sept. ‘08

CHF

08:15

Retail Sales (Real) YoY) (DEC)

--

-0.4%

1st contraction since Nov ‘09

CHF

08:30

SVME-PMI (JAN)

59.2

60.5

PMI’s mostly stronger as export demand picks up

EUR

08:45

Italian PMI Manufacturing (JAN)

54.8

56.6

EUR

08:50

French PMI Manufacturing (JAN)

54.3

54.9

EUR

08:55

German PMI Manufacturing (JAN)

60.2

60.5

EUR

08:55

German Unemployment Change (JAN)

-10K

-13K

Hits 18-year low

EUR

08:55

German Unemployment Rate (JAN)

7.5%

7.4%

EUR

09:00

Euro-zone PMI Manufacturing (JAN)

56.9

57.3

Manufacturing climbs on rising export demand

GBP

09:30

Net Consumer Credit (DEC)

0.0B

0.2B

Bounces back from contraction

GBP

09:30

Net Lending Sec. on Dwellings (DEC)

0.6B

-0.3B

2nd contraction in 2010

GBP

09:30

PMI Manufacturing (JAN)

58.0

62.0

Hits record high

GBP

09:30

M4 Ex- OFCs (3M) (YoY) (DEC)

--

3.0%

Falls back from record high in Nov.

GBP

09:30

M4 Money Supply (MoM) (DEC)

--

-1.3%

Hits record contraction

GBP

09:30

M4 Money Supply (YoY) (DEC)

--

-1.5%

GBP

09:30

MBA Mortgage Applications (JAN 28)

46.5K

42.3K

Worst since March ‘09

EUR

10:00

Euro-Zone Unemployment Rate (DEC)

10.1%

10.0%

Unch. for 2nd month

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