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Forex: Euro Remains Vulnerable As Risk For Contagion Intensifies, British Pound Regains Footing Ahead Of BoE

Forex: Euro Remains Vulnerable As Risk For Contagion Intensifies, British Pound Regains Footing Ahead Of BoE

2011-03-09 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Interest Rate Expectations Gather Pace
  • Euro: German Industrial Production Tops Forecast
  • U.S. Dollar: Wholesale Inventories On Tap

The Euro pared the decline from the previous day as the economic docket reinforced an improved outlook for the region, but the rebound in the exchange rate is likely to be short-lived as fears surrounding the sovereign debt crisis continue to bear down on market sentiment. The EUR/USD advanced to a high of 1.3940 as industrial outputs in Germany increased 1.8% in January, but the single-currency may face headwinds going into the North American trade as the yield tied to Portugal’s 10-Year bond advances to a record-high of 7.70 percent. As the risk for contagion intensifies, the recent selloff in the euro-dollar may gather pace going into the middle of the week, and the exchange rate may continue to retrace the advance from earlier this month as European policy makers maintain a relaxed approach in addressing the debt crisis.

In turn, the European Central Bank may actively increase its participation in the bond market, and the Governing Council could be forced to delay its exit strategy even further as the governments operating under the fixed-exchange rate system face rising borrowing costs. With the EU Summit on tap for later this week, the bearish sentiment underlying the single-currency may gather pace as European policy makers struggle to meet on common ground, and there certainly is a great risk of seeing a sharp selloff in the exchange rate as investors speculate Portugal to share Ireland’s ill fate. As a result, the reversal in the EUR/USD should gather pace over the coming days, and the pair may revert back to the 20-Day moving average at 1.3738 as the relative strength index comes off of overbought territory.

The British Pound advanced to high of 1.6242 during the European trade, and the rebound in the exchange may gather pace ahead of the Bank of England interest rate decision on Thursday as investors speculate the central bank to gradually normalize monetary policy this year. With the BoE is widely expected to maintain its current policy in March, the MPC will refrain from releasing a policy statement once again, but the rate decision could still generate a bullish reaction in the sterling as interest rate expectations accelerate. According to Credit Suisse overnight index swaps, investors see borrowing costs in the U.K. rising by more than 75bp over the next 12-months, and the GBP/USD may make another run at 1.6400 in the days ahead as it maintains the upward trend from earlier this year.

The U.S. dollar struggled to hold its ground during the overnight session, but the greenback may regain its footing going into the North American trade as investors appear to be scaling back their appetite for yields. As the economic docket remains fairly light for Wednesday, market sentiment is likely to dictate price action for the major currencies, but the rise in risk appetite could taper off going into the middle of the week as the uncertainties surrounding the global economy intensifies. With European equities come off of their daily highs, we may see risk aversion flowing back into the financial markets, and the U.S. dollar may recoup the overnight losses as it benefits from safe-haven flows.

Will the EUR/USD Maintain the Upwards Trend From Earlier This Year? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

15:00

10:00

Wholesale Inventories (JAN)

1.0%

1.0%

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

New Zealand Net Migration (JAN)

--

450

Continues falling trend after spike in Dec.

AUD

23:30

Westpac Consumer Confidence (MAR)

--

-2.4%

3rd contraction in last 5

AUD

23:30

Westpac Consumer Confidence Index (MAR)

--

104.1

Resumes downward trend

JPY

23:50

Machine Orders (MoM) (JAN)

3.0%

4.2%

2nd expansion after 3 contractions

JPY

23:50

Machine Orders (YoY) (JAN)

5.1%

5.9%

Rebounds from contraction in Dec.

GBP

00:01

BRC Shop Price Index (FEB)

--

2.7%

Continues improving trend

AUD

00:30

Home Loans (MoM) (JAN)

-1.0%

-4.5%

1st contraction since June ‘10

AUD

00:30

Investment Lending (MoM) (JAN)

--

-6.8%

2nd contraction in last three

AUD

00:30

Value of Loans (MoM) (JAN)

--

-4.6%

Weakens for the first time in seven months.

CHF

08:15

CPI (MoM) (FEB)

0.3%

0.4%

Rebounds from contraction in Jan

CHF

08:15

CPI (YoY) (FEB)

0.4%

0.5%

Rebounds after dip lower in Jan.

GBP

09:30

Visible Trade Balance (pounds) (JAN)

-8500

-7057

Narrowest since Feb ‘10

GBP

09:30

Total Trade Balance (pounds) (JAN)

-4000

-2950

GBP

09:30

Trade Balance Non-EU (pounds) (JAN)

-5150

-4173

Narrowest since April ‘10

EUR

11:00

German Industrial Production (MoM) (JAN)

1.7%

1.8%

Rises after two consecutive contractions

EUR

11:00

German Industrial Production (YoY) (JAN)

11.1%

12.5%

Fastest expansion since May ‘10

USD

12:00

MBA Mortgage Applications (MAR 4)

--

15.5%

Largest advance since June.

CAD

13:30

New Housing Price Index (MoM) (JAN)

0.1%

0.2%

Increases for the third month.

CAD

13:30

New Housing Price Index (YoY) (JAN)

1.9%

1.9%

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