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Forex: Euro To Face Additional Headwinds Ahead of EU Summit, British Pound Poised To Retrace November Decline

Forex: Euro To Face Additional Headwinds Ahead of EU Summit, British Pound Poised To Retrace November Decline

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

  • Japanese Yen: Mixed Against Majors
  • British Pound: Construction Unexpectedly Expands
  • Euro: S&P Cuts Ireland’s Credit Rating
  • U.S. Dollar:Risk To Drive Price Action on Light Event Risks

The Euro fell back from a high of 1.3860 as Standard and Poor’s lowered its credit rating for Ireland, and the single-currency may retrace the advance from earlier this week as the risk for contagion intensifies. S&P cut Ireland’s rating to A- from A and went onto say that the nation’s may be downgraded further given “the uncertainties surrounding the size of Ireland’s additional capital needs for its largely state-owned financial sector.” As the European debt crisis comes back into focus, we are likely to see the European Central Bank attempt to calm market fears at its interest rate decision tomorrow, but the single-currency may face additional headwinds ahead of the EU Summit as the group struggles to meet on common ground.

A government official in Germany said the EU may consider increasing the scope of the European Financial Stability Fund in order to stem the risk for contagion, but opposed empowering the bailout fund with the ability to directly purchase government bonds as they weigh alternative measures to restore investor confidence. In turn, we may see the EU fail to deliver a concrete solution at the summit on Friday, and the fears surrounding the debt crisis should continue to bear down on the exchange rate as the group struggles to meet on common ground. As the near-term rally in the EUR/USD tapers off ahead of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900, we should see a small correction play out in the days ahead, and the short-term reversal may gather pace going into the following week as the relative strength index falls back from a high of 69.

The British Pound extended the rally from earlier this week as the economic docket reinforced an improved outlook for future growth, and the exchange rate may continue to retrace the decline from back in November as the recovery in the U.K. gradually gathers pace. Building activity in Britain unexpectedly expanded in January, with the PMI Reading advancing to 53.7 from 49.1 in the previous month, and the data may encourage the Bank of England to reassess its economic forecast as private sector activity improves. As market participants expect the BoE to gradually normalize monetary policy this year, interest rate expectations may continue to gather pace over the coming months, and hawkish comments from the central bank should help to prop up the sterling as investors weigh the prospects for future policy. However, as price action struggles to hold above the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200-20, we may see the exchange rate consolidate going into the end of the week, but the exchange rate looks poised to push higher over the near-term as it maintains the upward trend from January.

U.S. dollar price action was mixed overnight, with the USD/JPY advancing to a high of 81.59, but we may see the greenback regain its footing going into the North American trade as investors scale back their appetite for risk. As the economic docket remains fairly light for Wednesday, we expect risk sentiment to drive price action over the next 12 hours of trading, and the U.S. dollar may recoup the losses from earlier this week as equity futures foreshadow a lower open for the U.S. market. However, we may see mixed price action going into Thursday as market participants eagerly wait for the highly anticipated U.S. non-farms payroll report due out at the end of the week, and the data could spark a near-term rally in the dollar as employment in the world’s largest economy is expected to improve for the fourth consecutive month in January.

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

15:30

10:30

DOE U.S. Crude Oil Inventories (JAN 28)

--

4836K

USD

15:30

10:30

DOE U.S. Distillate Inventory (JAN 28)

--

-140K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (JAN 28)

--

2404K

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Monetary Base (YoY) (JAN)

--

5.5%

Continues to slow after peaking in Nov. ‘10

AUD

00:00

HIA New Home Sales (MoM) (DEC)

--

-0.6%

Weakens for second month

GBP

09:30

PMI Construction (JAN)

49.5

53.7

Rebounds from contraction in Dec

EUR

10:00

Euro-zone PPI (MoM) (DEC)

0.7%

0.8%

Indications of inflationary pressure building, may boost rate hike expectations

EUR

10:00

Euro-zone PPI (YoY) (DEC)

5.2%

5.3%

USD

12:00

MBA Mortgage Applications (JAN 28)

--

11.3%

Third rise in January.

USD

12:30

Challenger Job Cuts (YoY) (JAN)

--

-46.1%

Largest decline since August.

USD

13:15

ADP Employment Change (JAN)

140K

187K

Reinforces improved outlook for NFP’s

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