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Forex: Euro To Threaten July Rebound, British Pound At Risk

Forex: Euro To Threaten July Rebound, British Pound At Risk

2011-09-05 13:20:00
David Song, Currency Strategist
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Talking Points

  • Euro: Merkel’s Christian Democratic Union Comes Under Pressure, Banks Curb Lending
  • British Pound: BoE To Restart Asset Purchases, Threatens Rebound From 1.5781
  • U.S. Dollar: Rebound Gathers Pace During Holiday Trade

Euro: Merkel’s Christian Democratic Union Comes Under Pressure, Banks Curb Lending

The Euro tumbled to a low of 1.4107 as German Chancellor Angela Merkel’s Christian Democratic Union lost the election in six states, while a report by the European Central Bank showed lenders parked EUR 151.1B with the ECB overnight to mark the biggest deposit since August 2010. Fading support for Chancellor Merkel’s initiatives to contain the sovereign debt crisis may come under increased scrutiny as taxpayers are force to foot the bill, and we are likely to see an increased reliance on the central bank to address the risks for the region as European policy makers struggle to meet on common ground.

As banks across the region scale back on lending, increased turmoil in the financial system is likely to further dampen economic activity, and the slowing recovery in Europe may lead ECB President Jean-Claude Trichet to adopt a dovish tone for monetary policy as the fundamental outlook remains clouded with high uncertainty. In turn, the Governing Council may continue to delay its exit strategy further, and the group may show an increased willingness to adopt additional measures to stimulate the economy at the interest rate decision scheduled for later this week. As the near-term correction in the EUR/USD gathers pace, the exchange rate may threaten the rebound from 1.3836, and the single-currency may trade heavy throughout the remainder of the year as European policy makers struggle to restore investor confidence.

British Pound: BoE To Restart Asset Purchases, Threatens Rebound From 1.5781

The British Pound bounced back from an overnight low of 1.6089, but the sterling could face additional headwinds over the near-term as market participants see the Bank of England restarting its asset purchases in September. As the U.K. faces a slowing recovery, the BoE is expected to reinstate its emergency measures to stem the risks for the economy, but we may see a growing shift within the Monetary Policy Committee as board member Adam Posen maintains his vote to expand the asset purchase program beyond the GBP 200B target. Although the committee is widely expected to maintain its current policy later this week, market participants may still show a bearish reaction to the rate decision on speculation for additional monetary stimulus, and the GBP/USD may give back the rebound 1.5781 as the exchange rate struggles to hold above the 200-Day moving average at 1.6120.

U.S. Dollar: Rebound Gathers Pace During Holiday Trade

The U.S. dollar continued to gain ground on Monday and the reserve currency should continue to trend higher throughout the remainder of the day as it benefits from safe-haven flows. However, thin trading conditions could produce choppy price action as U.S. traders remain offline for the holiday weekend, and the shift in risk sentiment may gather pace over the next 24-hours of trading as the fundamental outlook for the global economy remains clouded with high uncertainty. As market participants return to their desks on Tuesday, the dismal Non-Farm Payrolls report may come back into focus, and the slew of data scheduled for this week could further dampen the prospects for future growth as the world’s largest economy faces a slowing recovery. In turn, risk aversion may continue to flow into the currency market over the coming days, and the greenback looks poised to recoup the losses from the previous month as investors scale back their appetite for yields.

Will the EUR/USD Trend Sideways in September? 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

No Scheduled Releases

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

AiG Performance of Service Index (AUG)

--

52.1

Expands for first time since April.

AUD

0:30

TD Securities Inflation (MoM) (AUG)

--

-0.1%

Contracts for the first time since October 2009.

AUD

0:30

TD Securities Inflation (YoY) (AUG)

--

2.9%

AUD

1:30

Inventories (2Q)

0.3%

2.5%

Biggest advance since 2Q 2003.

AUD

1:30

Company Operating Profit (QoQ) (2Q)

2.9%

6.7%

Fastest pace of growth since 2Q 2010.

AUD

1:30

ANZ Job Advertisements (MoM) (AUG)

--

-0.6%

Contracts for two straight months.

CNY

2:30

HSBC Purchasing Manager Index Services (AUG)

--

50.6

Lowest since the series began in November 2005.

EUR

7:45

Italian PMI Services (AUG)

48.4

48.4

Slowest pace of growth since August 2009.

EUR

7:50

French PMI Services (AUG F)

56.1

56.8

EUR

7:55

German PMI Services (AUG F)

50.4

51.1

EUR

8:00

Euro-Zone PMI Services (AUG F)

51.5

51.5

EUR

8:00

Euro-Zone PMI Composite (AUG F)

50.9

50.7

GBP

8:30

Purchasing Manager Index Services (AUG)

54.0

51.1

Lowest since December 2010.

EUR

8:30

Euro-Zone Sentix Investor Confidence (SEP)

-17.7

-15.4

Lowest since August 2009.

GBP

8:30

Official Reserves (Changes) (AUG)

--

$2237M

Highest since March.

EUR

9:00

Euro-Zone Retail Sales (MoM) (JUL)

0.0%

0.2%

Increases for the second month.

EUR

9:00

Euro-Zone Retail Sales (YoY) (JUL)

-1.0%

-0.2%

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