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Forex: Euro Outlook Remains Bearish Ahead Of ECB, USD Struggles

Forex: Euro Outlook Remains Bearish Ahead Of ECB, USD Struggles

2011-08-03 13:00:00
David Song, Strategist
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Talking Points

  • Euro: Retail Sales Tops Forecast, All Eyes On ECB
  • Swiss Franc: Tumbles Lower As SNB Cuts Rate To Zero
  • British Pound: To Consolidate Further, BoE To Maintain Current Policy
  • U.S. Dollar: Struggles To Hold Ground, ISM Non-Manufacturing On Tap

The larger-than-expected rise in European retail sales pushed the EUR/USD to an overnight high of 1.4343, but the rebound in the exchange rate could be short-lived as fears surrounding the sovereign debt crisis continue to bear down on market sentiment. As the EU struggles to contain the risk for contagion, there’s speculation that the group may take additional steps to calm market fears after Italian Finance Minister Giulio Tremonti met with Euro-Group President Jean-Claude Juncker earlier today, and we may see the European Central Bank soften its hawkish tone for monetary policy as record-high financing costs dampens the outlook for future growth.

According to Credit Suisse overnight index swaps, market participants see a zero percent chance for a 25bp rate hike at the rate decision scheduled for Thursday, and the ECB may see scope to keep the benchmark interest rate at 1.50% for the remainder of the year as the region appears to be facing a slowing recovery. Should central bank President Jean-Claude Trichet talk down the risk for inflation and strike a balanced tone for the region, we could see a resumption of the near-term reversal from 1.4534, and the EUR/USD may threaten the rebound from 1.3836 as interest rate expectations falter.

The Swiss Franc weakened across the board after the Swiss National Bank unexpectedly lowered its benchmark interest rate ‘as close to zero as possible,’ and the central bank may step up its efforts to stem the marked appreciation in the local currency as it weighs on the real economy. Indeed, the move suggests that we will see the SNB intervene in the currency market to balance the risks for the region, but the central bank may struggle to stem the bullish sentiment underlying the Franc as investors look for an alternative to the reserve currency. As the USD/CHF bounces back from a record-low of 0.7608, there appears to be a near-term correction in the exchange rate, but we would need to see the relative strength index cross back above 30 to see the rebound gather pace in the days ahead.

The British Pound extended the rebound from the previous day and the GBP/USD looks poised to trend sideways over the near-term as investors weigh the outlook for future policy. Although the Bank of England is scheduled to announce its interest rate decision tomorrow, we are likely to see the central bank refrain from releasing a policy statement as the MPC upholds its current policy, and market participants will certainly keep a close eye on the meeting minutes, which are due out on August 17. As the U.K. faces a slowing recover, we could see a growing shift within the committee, and a growing number of the board may see scope to expand the asset purchase program beyond the GBP 200B target as policy makers see a risk of undershooting the 2% target for inflation. In turn, the sterling remains at risk of facing additional headwinds in the weeks ahead, and the GBP/USD may give back the rebound from 1.5781 as the central bank continues to defy calls to start normalizing monetary policy.

U.S. dollar price action was largely mixed on Wednesday, with the greenback giving back some of the advances from the previous day, but we may see the reserve currency regain its footing during the North American trade should we see risk aversion continue to flow into the currency market. However, there could be a shift in market sentiment as equity futures foreshadow a higher open for the U.S. market, and investors may increase their appetite for yields as the economic docket is expected to show an improved outlook for future growth. Indeed, the ISM Non-Manufacturing index is expected to increase to 53.5 in July from 53.3 in the previous month, and the faster pace of growth could fuel risk appetite as service-based activity accounts for more than two-thirds of the economy.

Will the Descending Triangle in the EUR/USD Continue To Play Out? 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

EDT

Release

Expected

Prior

USD

14:00

10:00

ISM Non-Manufacutring Composite (JUL)

53.8

53.3

USD

14:00

10:00

Factory Orders (JUN)

-0.5%

0.8%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (JUL 29)

1500K

2296K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (JUL 29)

250K

1022K

USD

14:30

10:30

DOE U.S. Distillate Inventory (JUL 29)

1500K

3385K

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

BRC Shop Price Index (YoY) (JUL)

--

2.8%

Declines for first time in two-months.

AUD

23:30

AiG Performance of Service Index (JUL)

--

48.8

Contracts for third month.

CNY

1:00

Purchasing Manager Index Non-Manufacturing (JUL)

--

59.6

Reads in 50 for second month.

AUD

1:30

Retail Sales s.a. (MoM) (JUN)

0.4%

-0.1%

Contracts for second month.

AUD

1:30

Retail Sales Ex Inflation(QoQ) (2Q)

0.4%

0.3%

AUD

1:30

Trade Balance (Australian dollar) (JUN)

2200M

2052M

Narrows for first time in two months.

CNY

2:30

HSBC Purchasing Manager Index Services (JUL)

--

53.5

Slows for second month.

CHF

7:00

Swiss National Bank Interest Rate Decision

--

0.00%

Surprises the market to curb the marked rally in Swiss Franc.

EUR

7:15

French PMIServices (JUL F)

54.2

54.2

Activity slows for third month, suggests slowing recovery across Europe.

EUR

7:45

Italian PMIServices (JUL)

47.4

48.6

EUR

7:55

German PMIServices (JUL F)

52.9

52.9

EUR

8:00

Euro-Zone PMIServices (JUL F)

51.4

51.6

EUR

8:00

Euro-Zone PMIComposite (JUL F)

50.8

51.1

GBP

8:30

Purchasing Manager Index Services (JUL)

53.2

55.4

Expands at faster pace for second month.

GBP

8:30

Official Reserves (Changes) (JUL)

--

$2082M

First positive reading since April.

EUR

9:00

Euro-Zone Retail Sales (MoM) (JUN)

0.5%

0.9%

Rises for the fourth month this year.

EUR

9:00

Euro-Zone Retail Sales (YoY) (JUN)

-1.0%

-0.4%

USD

11:00

MBA Mortgage Applications (JUL 29)

--

7.1%

Second advance in July.

USD

11:30

Challenger Job Cuts (YoY) (JUL)

--

59.4%

Highest since March 2009.

USD

12:15

ADP Employment Change (JUL)

100K

114K

Increases for 18 straight months.

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