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Forex: Euro Extends Decline As ECB Holds Cautious Tone, British Pound Pares Advance

Forex: Euro Extends Decline As ECB Holds Cautious Tone, British Pound Pares Advance

2011-02-03 13:30:00
David Song, Currency Strategist
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Talking Points

  • Japanese Yen: Remains Battered Against Majors
  • British Pound: U.K. Services Expands in January
  • Euro: ECB Holds Rate at 1.00%
  • U.S. Dollar:ISM Non-Manufacturing, Fed Chairman Bernanke on Tap

The Euro extended the overnight decline as the European Central Bank maintained a cautious outlook for the region, and the single-currency may continue to pare the advance from earlier this week as investors scale back speculation for a rate hike later this year. The ECB held the benchmark interest rate at 1.00% in February and went onto say that monetary policy remains “appropriate” as the region faces an uneven recovery. Central bank President Jean-Claude Trichet said that the risk for growth remains tilted to the downside as the governments operating under the fixed-exchange rate system implement tough austerity measures, and went onto say that the uncertainties clouding the economic outlook remain elevate as policy makers struggle to restore investor confidence.

In regards to inflation, Mr. Trichet said price stability will be maintained over the medium-term, although rising commodity prices could add additional upward pressures on price growth, and stated that it is absolutely essential to avoid the second-round effects as the Governing Council maintains its one and only mandate to ensure price stability. As the ECB maintains a neutral outlook for future policy, the central bank may look to support the real economy throughout the first-half of 2011, but the euro could face additional headwinds going into the end of the week as the EU Summit kicks off tomorrow. As the risk for contagion intensifies, we may see European policy makers take additional steps to restore financial stability, but the relaxed approach in addressing the debt crisis may continue to bear down on market sentiment as the group struggles to meet on common ground. In turn, we may see the EUR/USD continue to retrace the advance from earlier this week, and the exchange rate may fall back to the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as it searches for support.

The British Pound rallied for the fourth consecutive day, with the exchange rate advancing to a high of 1.6277, but the lack of momentum to test the November high (1.6298) could spur a short-term reversal in the sterling as it appears to be carving a double top in February. The GBP/USD popped higher overnight as the gauge for U.K. services increased to 54.5 in January from 49.7 in the previous month, but the exchange rate appears to be consolidating going into the North American trade as investors scale back their appetite for risk. As the relative strength index remains just shy of 70, we may see a correction play out going into the end of the week, but we should see the GBP/USD find support at former resistance around 1.6000. However, with the Bank of England scheduled to announce its interest rate decision next week, speculation for a rate hike later this year could prop up the exchange rate over the coming days, and rate expectations may continue to gather pace going forward as MPC board member Andrew Sentance and Martin Weale see scope to gradually normalize monetary policy.

The greenback bounced back against most of its major counterparts on Thursday, with the USD/JPY advancing to a high of 81.84, but the dollar could face increased volatility during the North American trade as Fed Chairman Ben Bernanke is scheduled to speak about the economy at 18:00 GMT. As equity futures foreshadow a lower open for the U.S. market, the downturn in risk should help to generate additional U.S. dollar strength, but the ISM Non-Manufacturing report due out at 15:00 GMT could spark a bearish reaction in the greenback as market participants expect service-based activity to expand at a slower pace in January. Meanwhile, we are likely to see Chairman Bernanke maintain a cautious outlook for the world’s largest economy given the ongoing slack within the private sector, and the central bank head may continue to cast doubts for a sustainable recovery as the fundamental outlook remains clouded with high uncertainty.

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 Non-Manufacturing Composite (JAN)

57.0

57.1

USD

15:00

10:00

Factory Orders (DEC)

1.0%

0.7%

USD

18:00

13:00

Fed Chairman Ben Bernanke Speaks on U.S. Economy

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Employment Change (QoQ) (4Q)

0.2%

-0.5%

Employment contracts for time in 2010. Highest jobless rate since second quarter.

NZD

21:45

Employment Change (YoY) (4Q)

2.0%

1.3%

NZD

21:45

Unemployment Rate (4Q)

6.5%

6.8%

NZD

21:45

Participation Rate (QoQ) (4Q)

68.2%

67.9%

AUD

22:30

AiG Performance of Service Index (JAN)

--

45.5

Contracts for the third month.

AUD

0:30

Building Approvals (MoM) (DEC)

1.3%

8.7%

Biggest rise since March.

AUD

0:30

Building Approvals (YoY) (DEC)

-13.7%

-5.0%

AUD

0:30

Trade Balance (Australian dollar) (DEC)

1600M

1981M

Surplus narrows for third month.

CNY

1:00

Purchasing Manager Index Non-Manufacturing (JAN)

--

56.4

Services cool on tightening policy.

CHF

7:15

Trade Balance (Swiss franc) (DEC)

--

1.28B

Smallest surplus since August.

CHF

7:15

Exports (MoM) (DEC)

--

4.2%

CHF

7:15

Imports (MoM) (DEC)

--

-4.1%

EUR

8:45

Italian Purchasing Manager Index Services (JAN)

50.5

49.9

Services expand at the fastest pace since August. Composite index at highest since April.

EUR

8:50

French Purchasing Manager Index Services (JAN F)

57.1

57.8

EUR

8:55

German Purchasing Manager Index Services (JAN F)

60.0

60.3

EUR

9:00

Euro-Zone Purchasing Manager Index Services (JAN F)

55.2

55.9

EUR

9:00

Euro-Zone Purchasing Manager Index Composite (JAN F)

56.3

57.0

GBP

9:30

Purchasing Manager Index Services (JAN)

51.3

54.5

Rebounds to mark highest reading since May.

GBP

9:30

Official Reserves (Changes) (JAN)

--

-$384M

Largest decline since November.

EUR

10:00

Euro-Zone Retail Sales (MoM) (DEC)

0.5%

-0.6%

Contracts for the second straight month.

EUR

10:00

Euro-Zone Retail Sales (YoY) (DEC)

0.2%

-0.9%

EUR

12:45

European Central Bank Interest Rate Decision

1.00%

1.00%

Holds hawkish outlook as inflation accelerates.

USD

13:30

Non-Farm Productivity (4Q P)

2.0%

2.6%

Fastest pace of growth since 1Q.

USD

13:30

Unit Labor Costs (4Q P)

0.5%

-0.6%

Contracts throughout 2010.

USD

13:30

Initial Jobless Claims (JAN 29)

420K

415K

Drop in claims bodes well for NFP’s.

USD

13:30

Continuing Claims (JAN 22)

3950K

3925K

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