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Forex: USD Correction To Gather Pace, Euro At Risk On ECB

Forex: USD Correction To Gather Pace, Euro At Risk On ECB

2011-09-07 13:00:00
David Song, Currency Strategist
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Talking Points

  • U.S. Dollar: Weighed By Risk Appetite, Fed’s Beige Book On Tap
  • Euro: Finland Renounces Greek Bailout, All Eyes On ECB
  • British Pound: Fundamental Outlook Weakens Ahead Of BoE Rate Decision

U.S. Dollar: Weighed By Risk Appetite, Fed’s Beige Book On Tap

The U.S. dollar weakened against all of its major counterparts during the overnight trade, and the greenback may continue to give back the advance from earlier this month as market participants increase their appetite for yields. As we expect the Fed’s Beige Book to highlight a weakened outlook for the world’s largest economy, the survey could foreshadow an impending need for additional monetary stimulus, and speculation for another round of quantitative easing is likely to fuel risk, which should translate into more USD weakness. In light of the slowing recovery, the FOMC may employ a range of policy tools to stimulate the ailing economy, and the bearish sentiment underlying the greenback may gather pace as the Fed extends its easing cycle. With equity futures pointing to a higher open for the U.S. market, we should see the rebound in market sentiment carry into the North American trade, and the short-term correction in the greenback may pan out over the remainder of the week as market participants anticipate the central bank to expand its balance sheet further.

Euro: Finland Renounces Greek Bailout, All Eyes On ECB

The Euro pared the overnight advance to 1.4030 and the single-currency may trade heavy throughout the remainder of the day as heightening fears surrounding the sovereign debt crisis instills a weakened outlook for the region. Indeed, Finland’s Prime Minister, Jyrki Katainen, said the country’s participation in Greece’s second bailout package ‘depends on the collateral issue,’ while yields tied to Greek bonds rose to fresh record-highs as the deadlock amongst European policy makers bears down on investor confidence. As the EU struggles to meet on common ground, there appears to be an increased reliance on the European Central Bank to balance the risks for the region, and the Governing Council may step up its efforts to shore up the economy as the region faces a slowing recovery. As we expect ECB President Jean-Claude Trichet to soften his hawkish tone for monetary policy at the rate decision scheduled for Thursday, the single-currency may trade heavy over the next 24-hours of trading, and the EUR/USD may threaten the rebound from 1.3836 should the ECB show an increased willingness to delay its exit strategy further.

British Pound: Fundamental Outlook Weakens Ahead Of BoE Rate Decision

The British Pound regained its footing on Wednesday, with the GBP/USD advancing to an overnight high of 1.6039, but market participants may show a bearish reaction to the Bank of England interest rate decision even as the central bank refrains from releasing a policy statement. Although the BoE is widely expected to maintain its current policy, the meeting minutes, which are due out on September 21, could highlight a growing rift within the MPC, and the committee may show an increased willingness to expand the asset purchase program beyond the GBP 200B target in an effort to stem the risk for a double-dip recession. The slowing recovery in the U.K. may prompt the BoE to further stimulate the ailing economy, and speculation for additional monetary support is likely to bear down on the sterling as interest rate expectations falter. In turn, the small rebound in the GBP/USD could be short-lived, and the pound-dollar may give back the advance from July (1.5781) as the fundamental outlook for the U.K. deteriorates.

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

CAD

13:00

9:00

Bank of Canada Interest Rate Decision

1.00%

1.00%

CAD

14:00

10:00

Ivey Purchasing Managers Index s.a. (AUG)

55.5

46.8

CAD

14:00

10:00

Ivey Purchasing Managers Index (AUG)

55.0

45.4

GBP

14:00

10:00

NIESR Gross Domestic Product Estimate (AUG)

--

0.6%

USD

15:15

11:15

Fed's Charles Evans Speaks on U.S. Economy, Monetary Policy

USD

18:00

14:00

Fed Releases Beige Book Economic Survey

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

BRC Shop Price Index (YoY) (AUG)

--

2.7%

Slows for second month.

AUD

23:30

AiG Performance of Construction Index (AUG)

--

32.1

Lowest since March 2009.

JPY

23:50

Official Reserve Assets (AUG)

--

$1218.5B

Highest since the series began in 1980

AUD

1:30

Gross Domestic Product (QoQ) (2Q)

1.0%

1.2%

Largest expansion since 2Q 2010.

AUD

1:30

Gross Domestic Product (YoY) (2Q)

0.7%

1.4%

JPY

3:21

Bank of Japan Interest Rate Decision

0.10%

0.10%

JPY

5:00

Leading Index (JUL P)

105.9

106.0

Highest since records began in 1980.

JPY

5:00

Coincident Index (JUL P)

108.8

109.0

AUD

6:30

Foreign Reserves (Australian dollar) (AUG)

--

A$43.8B

Highest since October 2010.

GBP

8:30

Industrial Production (MoM) (JUL)

0.2%

-0.2%

Contracts for third time this year.

GBP

8:30

Industrial Production (YoY) (JUL)

-0.4%

-0.7%

GBP

8:30

Manufacturing Production (MoM) (JUL)

0.0%

0.1%

Increases for the fourth time this year.

GBP

8:30

Manufacturing Production (YoY) (JUL)

1.9%

1.9%

EUR

10:00

German Industrial Production s.a. (MoM) (JUL)

0.5%

4.0%

Biggest advance since 1991.

EUR

10:00

German Industrial Production n.s.a. and w.d.a. (YoY) (JUL)

6.5%

10.1%

USD

11:00

MBA Mortgage Applications (SEP 2)

--

-4.9%

Falls for third week.

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