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Forex: U.S. Dollar Rally At Risk, British Pound Correction On Tap

Forex: U.S. Dollar Rally At Risk, British Pound Correction On Tap

2011-09-21 13:30:00
David Song, Currency Strategist
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Talking Points

  • U.S. Dollar: Rallies On Risk Aversion, All Eyes On FOMC
  • British Pound: BoE Sees Further Easing, Further Weakness Ahead
  • Euro: Bundesbank Curbs Speculation For More ECB Bond Purchases

U.S. Dollar: Rallies On Risk Aversion, All Eyes On FOMC

The USD rallied against most of its major counterparts as investors scaled back their appetite for risk, and the reserve currency may appreciate further during the North American trade as equity futures foreshadow a lower open for the U.S. market. However, a rebound in U.S. existing home sales could spur a shift in market sentiment, and a positive development may encourage risk-taking behavior as the outlook for future growth improves.

Nevertheless, we may see market volatility thin later today as the Federal Open Market Committee is scheduled to announce their interest rate decision at 18:15 GMT, and the central bank may show an increased willingness to expand monetary policy further in order to stem the risks for a double-dip recession. Indeed, the Fed’s two-day meeting is expected to yield a broad plan on how the central bank intends to stimulate the ailing economy, and the committee may look to employ a broad range of tools over the coming months as growth and inflation falter. Should Fed Chairman Ben Bernanke turn increasingly cautious towards the economy, we are likely to see market participants diversify away from the greenback, and the dollar may give back the advance from earlier this month as speculation for further easing intensifies. In turn, we may see the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) give back the overnight advance to 9793, and the gauge may fall back towards the 23.6% Fibonacci retracement around 9699 as we head into the end of the week.

British Pound: BoE Sees Further Easing, Further Weakness Ahead

The British Pound fell to 1.5612 as the Bank of England talked up speculation for further easing, and the sterling may continue to give back the advance from earlier this year as the fundamental outlook for the U.K. deteriorates. Although the MPC voted 8-1 to maintain the asset purchase target at GBP 200B, most members of the committee said it was increasingly probable to expand monetary policy further, and we may see a growing rift within the BoE as the central bank sees a risk of undershooting the 2% target for inflation. As the GBP/USD slips below the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.5630-50, the exchange rate may ultimately retrace the rebound from December (1.5344), but we may see a near-term correction unfold over the remainder of the week as the pair remains oversold.

Euro: Bundesbank Curbs Speculation For More ECB Bond Purchases

The Euro pared the advance from the previous day and the single-currency may continue to retrace the rebound from 1.3494 as European policy makers struggle to calm market fears. Indeed, the EU is scheduled to meet in Athens next week to in order to further discuss a possible solution to address the sovereign debt crisis, and the ongoing turmoil in the European financial system is likely to produce an increased reliance on the central bank to balance the risks for the region. However, the Bundesbank talked down speculation for additional monetary support, arguing that there needs to be a ‘strict division between monetary and fiscal policy,’ and the European Central Bank may have little choice but to maintain a wait-and-see approach as the bond purchase program comes under increased scrutiny. As policy makers struggle to meet on common, the economic outlook for Europe continues to turn increasingly bleak, and the EUR/USD is likely to face additional headwinds over the near-term as the heightening risk for contagion bears down on market sentiment. In turn, the euro-dollar may trade heavy over the remainder of the week, and the exchange rate may threaten the rebound from back in February (1.3427) as it gives back the advance from the earlier this month.

Will the EUR/USD Break Below the 50.0% Fib? 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

Existing Home Sales (AUG)

4.75M

4.67M

USD

14:00

10:00

Existing Home Sales (MoM) (AUG)

1.7%

-3.5%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (SEP 16)

-1300K

-6704K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (SEP 16)

1350K

1940K

USD

14:30

10:30

DOE U.S. Distillate Inventory (SEP 16)

1000K

1711K

USD

18:15

14:15

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:45

Current Account Balance (2Q)

-0.671B

-0.921B

First deficit since 4Q 2010.

NZD

22:45

Current Account Deficit-GDP Ratio (2Q)

-4.0%

-3.7%

NZD

22:45

Net Migration s.a. (AUG)

--

200.0

Highest since February.

GBP

23:01

Nationwide Consumer Confidence (AUG)

47

48

Lowest since April.

JPY

23:50

Adjusted Merchandise Trade Balance (Yen) (AUG)

-22.1B

-294.4

Largest deficit since May. Imports increased the most since June 2010.

JPY

23:50

Merchandise Trade Balance Total (Yen) (AUG)

-300.0B

-775.3B

JPY

23:50

Merchandise Trade Exports (YoY) (AUG)

8.0

2.8

JPY

23:50

Merchandise Trade Imports (YoY) (AUG)

14.3

19.2

AUD

0:30

Westpac Leading Index (MoM) (JUL)

--

0.5%

Increases for the fifth month.

AUD

1:00

DEWR Internet Skilled Vacancies (MoM) (AUG)

--

-0.6%

Declines for the third straight month.

CNY

2:00

Conference Board Leading Economic Index

--

158.6

Highest reading all year.

NZD

3:00

Credit Card Spending s.a. (MoM) (AUG)

--

-1.0%

Declines for the third time this year.

NZD

3:00

Credit Card Spending (YoY) (AUG)

--

4.7%

JPY

4:30

All Industry Activity Index (MoM) (JUL)

0.5%

0.4%

Rises for the fourth month.

CHF

7:00

Money Supply M3 (YoY) (AUG)

--

7.6%

Biggest expansion since November 2009.

GBP

8:30

Public Finances (PSNCR) (Pounds) (AUG)

7.0B

11.8B

Largest shortfall since May.

GBP

8:30

Public Sector Net Borrowing (Pounds) (AUG)

11.3B

13.2B

GBP

8:30

Public Sector Net Borrowing ex Interventions (AUG)

13.0B

15.9B

USD

11:00

MBA Mortgage Applications (SEP 16)

--

0.6%

Rises for second week.

CAD

11:00

Consumer Price Index (MoM) (AUG)

0.1%

0.3%

Fastest pace of growth since June, highest core rate since April 2010.

CAD

11:00

Consumer Price Index (YoY) (AUG)

2.9%

3.1%

CAD

11:00

Bank Canada CPI Core (MoM) (AUG)

0.1%

0.4%

CAD

11:00

Bank Canada CPI Core (YoY) (AUG)

1.6%

1.9%

CAD

11:00

Consumer Price Index (AUG)

--

120.3

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