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Forex: Euro Extends Rally, British Pound Making Another Run At 1.6300

Forex: Euro Extends Rally, British Pound Making Another Run At 1.6300

2011-02-18 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Retail Spending Jumps In January
  • Euro: ECB Sees Scope To Normalize Monetary Policy
  • Canadian Dollar: Inflation Unexpectedly Cools In January
  • U.S. Dollar:All Eyes on G20 Summit

The Euro bounced back from an overnight low of 1.3544 as the European Central Bank held a hawkish tone for future policy, and the single-currency may continue to recoup the losses from earlier this month as investors speculate the Governing Council to reestablish its exit strategy later this year. ECB board member Lorenzo Bini Smaghi said the central bank may need to “take preemptive action” to stem the risk for inflation as the economic recovery gradually gathers pace, and went onto say that rising commodity prices will “have an unavoidable impact” on price growth during an interview Bloomberg Brief. According to Credit Suisse overnight index swaps, market participants anticipate the ECB to hike borrowing costs by at least 75bp over the next 12 months, and interest rate expectations may continue to gather pace over the near-term as price growth exceeds the central bank’s 2% target for the first time since 2008. In turn, the near-term rally in the EUR/USD may gather pace going into the end of the week, and the pair may continue to retrace the decline from earlier this month as price action clears the 20-Day SMA at 1.3636.

The British Pound advanced to a fresh weekly high of 1.6235 as retail spending in the U.K. jumped 1.6% in January, and the GBP/USD looks poised to make another run at 1.6300 as it retraces the decline from earlier this month. As the economic recovery in the U.K. picks up steam, the Bank of England may show an increased willingness to gradually normalize monetary policy this year, and there could be a growing shift within the MPC as the central bank struggles to stem the risks for inflation. With the BoE scheduled to release its policy meeting minutes on February 23, hawkish comments from the committee could prop up the exchange rate over the following week, and the pound-dollar should trend higher over the near-term as investors speculate the BoE to lift the benchmark interest rate off the record-low later this year.

The Canadian dollar lost ground following the consumer price report as the headline reading for inflation unexpectedly weakened from the previous month, and the loonie may continue to weaken going into the end of the week as investors scale back expectations for another round of monetary tightening. Consumer prices in Canada increased at an annual pace of 2.3% in January after expanding 2.4% in the previous month, while the core rate of inflation fell back to 1.4% from 1.5% in December. As price pressures cool, the Bank of Canada is likely to maintain its wait-and-see approach throughout the first-quarter, but the central bank may see scope to tighten monetary policy further later this year as economic activity pace. As growth in Canada continues to outpace the recovery in the U.S., the USD/CAD is likely to maintain the downward trending channel carried over from the previous year, and the exchange rate may work its way to 0.9800 as it searches for support.

U.S. dollar price action was mixed on Friday after China hiked the reserve requirement ratio (RRR) for commercial banks by 0.50% to 19.5%, and the major currencies may face increased volatility going into the end of the week as the G20 Summit kicks off in Paris. As the economic docket remains bare for the remainder of the week, market sentiment should dictate price action throughout the North American trade, and we may see risk appetite flow back into the currency market as equity futures foreshadow a higher open for the U.S. stock market. However, as global policy makers convene to address the global imbalances, fears surrounding the outlook for world economy could bear down on risk sentiment, and the major currencies could face choppy price action during the North American session as market liquidity thins ahead of the weekend.

Will the EUR/USD Continue To Retrace The Advance From Earlier This Year? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 02.14.2011

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

No Scheduled Releases

Currency

GMT

Release

Expected

Actual

Comments

AUD

00:30

Foreign Exchange Transaction (AUD) (JAN)

--

326M

Slowest pace of growth in three-months.

CNY

2:00

Conference Board Leading Economic Index (DEC)

--

-0.5%

JPY

5:30

Nationwide Dept Store Sales (YoY) (JAN)

--

-1.1%

Contracts for third month.

JPY

5:30

Tokyo Dept Store Sales (YoY) (JAN)

--

1.4%

Rebounds following a 0.3% contraction.

EUR

7:00

German Producer Prices (YoY) (JAN)

5.1%

5.7%

Highest annual reading since October 2008.

EUR

7:00

German Producer Prices (MoM) (JAN)

0.6%

1.2%

EUR

7:45

French Business Confidence Indicator (FEB)

109

106

Drops for the first time since November.

EUR

7:45

French own Company Production (FEB)

--

16

Weakens for the first time in three months.

EUR

7:45

French Production Outlook Indicator (FEB)

--

19

Falls to a two-month low.

EUR

9:00

Italian Industrial Orders s.a. (MoM) (DEC)

2.1%

5.4%

Orders increased for the first time since August.

EUR

9:00

Italian Industrial Orders n.s.a. (YoY) (DEC)

9.3%

17.4%

EUR

9:00

Italian Industrial Sales s.a. (MoM) (DEC)

--

-0.3%

Contracts for the first time since September.

EUR

9:00

Italian Industrial Sales n.s.a. (YoY) (DEC)

--

8.4%

GBP

9:30

Retail Sales ex Auto Fuel (MoM) (JAN)

0.2%

1.6%

Household spending rises the most since February.

GBP

9:30

Retail Sales ex Auto Fuel (YoY) (JAN)

4.3%

5.3%

GBP

9:30

Retail Sales inc Auto Fuel (MoM) (JAN)

0.5%

1.9%

GBP

9:30

Retail Sales inc Auto Fuel (YoY) (JAN)

4.0%

5.3%

CAD

12:00

Consumer Price Index (MoM) (JAN)

0.3%

0.3%

Easing price pressures will certainly allow the BoC to maintain a neutral policy stance going forward.

CAD

12:00

Consumer Price Index (YoY) (JAN)

2.4%

2.3%

CAD

12:00

Bank Canada Consumer Price Index Core (MoM) (JAN)

0.1%

0.0%

CAD

12:00

Bank Canada Consumer Price Index Core (YoY) (JAN)

1.5%

1.4%

CAD

12:00

Consumer Price Index (JAN)

--

117.8

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