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Forex: British Pound To Face Economic Headwinds, U.S. Personal Spending Tops Forecast

Forex: British Pound To Face Economic Headwinds, U.S. Personal Spending Tops Forecast

2011-03-28 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: BoE Maintains Mixed Outlook
  • Euro: Near-Term Trend At Risk
  • U.S. Dollar: Pending Home Sales on Tap

The British Pound pared the overnight decline to 1.5936 as Bank of England board member Andrew Sentance held a hawkish outlook for monetary policy, but the rebound in the exchange rate could be short-lived as the MPC looks to preserve its wait-and-see approach throughout the first-half of the year. Mr. Sentance argued that the benchmark interest rate should be raised “sooner rather than later” during an interview with the Flintshire Leader newspaperand went onto say that borrowing costs should be “raised gradually now” given the stickiness in price growth. At the same time, MPC member Adam Posen held a dovish tone while speaking with the Guardian newspaper and said quantitative easing should be expanded further as he expects inflation to fall back below the 2 percent target towards the middle of 2012.

Mr. Posen noted that the austerity measures will having a “meaningful” dampening effect on economic activity as the private sector remains weak, and went onto say that he would not pursue a second-term if his fundamental assessment turns out to be wrong. As the BoE struggles to meet on common ground, the drop in interest rate expectations may continue to instill a bearish outlook for the GBP/USD, but the central bank may face increased pressures to gradually normalize monetary policy over the coming months as the headline reading for inflation breeches 4 percent. As the GBP/USD retraces the advance from earlier this year, we may see 1.6000 turn out to be new resistance, and the exchange rate may revert back to the 200-Day moving average (1.5743) later this week as the economic docket is expected to reinforce a weakened outlook for future growth.

The Euro extended the decline from the previous week as fears surrounding the sovereign debt crisis continued to bear down on market sentiment, and the single-currency may break out of the upward trend from earlier this year as the bearish divergence in the relative strength index points to further losses. As the EUR/USD comes up against the 20-Day SMA at 1.3995, the near-term rally in the exchange rate is likely to be put to the test, and the single-currency could face is likely to face additional headwinds going forward as market participants speculate Portugal to share Ireland’s ill fate. A tentative break below the moving average is likely to expose the 50-Day SMA at 1.3782, and the euro-dollar may have carved out a near-term in March as the risk for contagion intensifies. However, hawkish comments from the European Central Bank may help to prop up the single-currency as the Governing Council looks to reestablish its exit strategy over the coming months, and speculation for higher borrowing costs could lead the EUR/USD to make another at 1.4300 as investors weigh the prospects for future policy.

U.S. dollar price action was largely mixed overnight, but the greenback appears to be regaining its footing as the economic docket reinforces an improved outlook for the world’s largest economy. Personals spending in the U.S. increased 0.7% in February, which topped forecasts for a 0.5% rise, while personal incomes advanced 0.3% amid projections for a 0.4% expansion. As private sector spending remains the leading driver of growth, the recent batch of economic releases may encourage the Fed to hold an improved outlook for the region, but the pending home sales report due out at 14:00 GMT could dampen the outlook for the real economy as the housing market remains depressed. In turn, a dismal housing sales report could spark a bearish reaction in the U.S. dollar, and the greenback may struggle to hold its ground throughout the North American trade as investors raise their appetite for risk.

Will the EUR/USD Maintain The Upward 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

14:00

10:00

Pending Home Sales (MoM) FEB

0.9%

-2.8%

USD

14:00

10:00

Pending Home Sales (YoY) FEB

--

-4.4%

USD

14:30

10:30

Dallas Fed Manufacturing Activity MAR

16.8

17.5

Currency

GMT

Release

Expected

Actual

Comments

USD

12:30

Personal Consumption Expenditure Core (MoM) (FEB)

0.2%

0.2%

Expands for the second month.

USD

12:30

Personal Consumption Expenditure Core (YoY) (FEB)

0.9%

0.9%

Fastest pace of growth since October.

USD

12:30

Personal Spending (FEB)

0.5%

0.7%

Increases for the eighth consecutive month.

USD

12:30

Personal Income (FEB)

0.4%

0.3%

Slowest pace of growth since November.

USD

12:30

Personal Consumption Expenditure Deflator (Yoy) (FEB)

1.6%

1.6%

Highest since May.

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