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Forex: Euro Eyes November High, British Pound Consolidation To Gather Pace

Forex: Euro Eyes November High, British Pound Consolidation To Gather Pace

2011-03-24 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Retail Sales Contracts
  • Euro: EU Summit In Focus
  • U.S. Dollar: Durable Goods Orders on Tap

Hawkish comments from the European Central Bank helped to prop up the single-currency on Thursday, and the rebound from 1.4052 may gather pace going into the end of the week as currency traders increase their appetite for risk. ECB board member Erkki Liikanen said inflation in the euro-area “may rise faster than expected” on the back of rising food and energy prices, but warned that the region “will continue to see sluggish economic growth in the coming years” as the governments operating under the fixed-exchange rate system take unprecedented steps to manage their public finances. Even as the region faces an uneven recovery, investors are still pricing a 100 percent chance for a 25bp rate hike next month, and see the benchmark interest rate rising by nearly 100bp over the next 12-months according to Credit Suisse overnight index swaps.

As interest rate expectations gather pace, the EUR/USD should continue to retrace the decline from 2010, and the pair certainly looks poised to make a run at the November high (1.4281) as it maintains the upward trend from earlier this year. However, as the EU Summit gets underway, the heightening risk for contagion could bear down on the exchange rate, and the euro may face additional headwinds going into the end of the month as market participants speculate Portugal to share Ireland’s ill fate. In turn, European policy makers may increase their efforts to restore investor confidence, but the renewed efforts to address the sovereign debt crisis may fail to calm market jitters as the governments in the euro-area face record-high borrowing costs. As the EU Summit takes the spotlight light, the outcome of the meeting is likely to dictate price action for the single-currency over the following week, and the EUR/USD may consolidate going into April as market participants weigh the outlook for future policy.

The British Pound extended the decline from the previous day as the economic docket reinforced a weakened outlook for U.K., and the sterling may continue to pare the advance from the previous week as interest rate expectations deteriorate. Retail spending in Britain slipped 0.8% in February, which exceeded forecasts for a 0.6% contraction, while sales excluding auto fuel weakened 1.0% during the same period to mark the biggest decline since January 2010. As private sector activity remains subdued, the Bank of England looks as though it will stick to its wait-and-see approach in the coming months, and the GBP/USD may continue to consolidate over the near-term as investors scale back expectations for higher borrowing costs within the first-half of 2011. In turn, the GBP/USD may continue to lose ground over the next 24 hours of trading, and the exchange rate may fall back towards 1.6000 as the pair searches for support.

U.S. dollar price action was largely mixed during the overnight trade, with the USD/JPY maintaining the tight range from earlier this week, but the slew of event risk lined up for the North American session is likely to spark increased volatility across the major currencies as investors weigh the prospects for future growth. Demands for U.S. durable goods are forecasted to increase 1.2% in February following the 2.7% expansion in the previous month, while initial and continuing jobless claims are expected to weaken further in March. As the fundamental developments reinforce an improved outlook for the world’s largest economy, the data is likely to spark a bullish reaction in the greenback, but the market may show a mixed reaction to the figures as risk sentiment continues to dictate price action for the major currencies.

Will the EUR/USD Continue to Retrace the Decline From November? 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

12:30

08:30

Continuing Claims (Mar 12)

3693K

3706K

USD

12:30

08:30

Initial Jobless Claims (Mar 19)

383K

385K

USD

12:30

08:30

Durable Goods Orders FEB

1.2%

3.2%

USD

12:30

08:30

Durables Ex-Transportation FEB

2.0%

-3.0%

USD

12:30

08:30

Cap Goods Orders Non-def-Ex Air

3.7%

-6.2%

USD

12:30

08:30

Cap Goods Ship Non-def Ex Air

--

-1.9%

USD

13:45

09:45

Bloomberg Consumer Comfort

48.5

48.5

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

GDP (Q4) QoQ

0.1%

0.2%

Manages to narrowly escape recession

NZD

21:45

GDP Q4 (YoY)

0.7%

0.8%

JPY

23:50

Merchandise Trade Balance Total (yen) FEB

897.3B

654.1B

Rebounds from contraction in Jan

JPY

23:50

Adjusted Merchandise Trade Balance FEB

676.8B

556.0B

Highest sicne March ‘10

JPY

23:50

Merchandise Trade Exports (YoY) FEB

9.1

9.0

Rebounds off sharp drop in Jan

JPY

23:50

Merchandise Trade Imports (YoY) FEB

4.4

9.9

Eases off 2-month high in Jan.

EUR

07:45

French Business Confidence Indicator MAR

105

109

Continues recent rising trend

EUR

07:45

French Own Company Production Outlook MAR

--

25

Hits record high

EUR

07:45

French Production Outlook Indicator MAR

--

21

EUR

08:00

French PMI Manufacturing MAR

56.0

56.6

Manufacturing growth weakened across EZ while services performed better. EZ composite dropped as growth outlook weakens

EUR

08:00

French PMI Services MAR

59.5

60.7

EUR

08:30

German PMI Manufacturing MAR

62.0

60.9

EUR

08:30

German PMI Services MAR

58.4

60.1

EUR

09:00

Euro-zone PMI Composite MAR

57.8

57.5

EUR

09:00

Euro-zone PMI Manufacturing MAR

58.3

57.7

EUR

09:00

Euro-zone PMI Services MAR

56.3

56.9

EUR

09:00

Italian Consumer Confidence Index MAR

106.0

105.2

Resumes weakening trend after climbing in Feb.

GBP

09:30

Retail Sales w/Auto Fuel (MoM)

-0.6%

-0.8%

UK sales slip as consumer’s fear for their jobs amid public sector cuts

GBP

09:30

Retail Sales w/Auto Fuel (YoY)

2.4%

1.3%

GBP

09:30

Retail Sales (MoM) FEB

-0.6%

-1.0%

GBP

09:30

Retail Sales (YoY) FEB

2.4%

1.2%

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