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Forex: Euro Fundamentals Deteriorate, British Pound Correction Ahead

Forex: Euro Fundamentals Deteriorate, British Pound Correction Ahead

2011-09-23 13:10:00
David Song, Currency Strategist
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Talking Points

  • Euro: ECB Talks Up Speculation For Rate Cut, More Nonstandard Measures
  • British Pound: Holds Above September 2010 Low, Correction On Tap
  • U.S. Dollar: Rallies On Risk Aversion, Sentiment To Dictate Price Action

Euro: ECB Talks Up Speculation For Rate Cut, More Nonstandard Measures

The Euro pared the overnight advance to 1.3566 and the single-currency may continue to lose ground during the North American trade as the heightening risk for contagion bears down on market sentiment. Indeed, European policy makers pledged to broaden the powers of the European Financial Stability Facility and to ‘maximize its impact’ by the next meeting on October 14-15, while European Central Bank board member Luc Coene said that the Governing Council may act next month should economic conditions in the euro-area deteriorate further.

Mr. Coene went onto say that a rate cut cannot be ruled out, and the central bank may show an increased willingness to expand its nonstandard measures as the ongoing turmoil within the financial system bears down on the real economy. At the same time, Governing Council member Ewald Nowotny said that the ECB stands ready to supply bank liquidity after the EU warned additional banks ‘may need to be recapitalized in the future,’ and announced that the central bank could introduce 12-months loans to help alleviate the weakness in the banking system. As policy makers pledge to balance the risks for the region, the renewed efforts may help to prop up the single-currency, but the near-term outlook for the EUR/USD remains bearish as price action struggles to hold above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500. As the relative strength index continues to trade in oversold territory, we expect to see lower prices until the gauge crosses back above 30, and the euro may trade heavy over the remainder of the year as Europe faces an increased risk of a double-dip recession.

British Pound: Holds Above September 2010 Low, Correction On Tap

The British Pound rallied to 1.5471 as U.K. mortgage approvals rose to a 15-month high, and the GBP/USD may continue to recoup the losses from earlier this week as the pair appears to have carved a bottom just ahead of the 50.0% Fibonacci retracement from the 2009 low to high around 1.5250-70. As the relative strength index comes off of its low, we may see a near-term correction pan out in the week ahead, and the exchange rate may work its way back towards the 38.2% Fib around 1.5690-1.5700. However, as market participants see the Bank of England expanding the asset purchase program beyond the GBP 200B target, speculation for additional easing dampens the outlook for the British Pound, and the exchange rate may come up against the September 2010 low around 1.5296 as policy makers see an increased risk of undershooting the 2% target for inflation.

U.S. Dollar: Rallies On Risk Aversion, Sentiment To Dictate Price Action

The greenback advanced against most of its major counterparts on Friday and the reserve currency may continue to gain ground throughout the North American trade as equity futures foreshadow a lower open for the U.S. market. As the flight to safety gathers pace, the drop in risk appetite should help to prop up the USD, but we may see a near-term correction pan out in the days ahead as the greenback remains overbought. As the economic docket remains fairly light for the remainder of the week, we should see risk sentiment continue to dictate price action for the major currencies, and the greenback appears to be carving out a short-term top as the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) struggles to push above 10,000.

Will the EUR/USD Retrace The Advance 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

EDT

Release

Expected

Prior

USD

17:30

13:30

Fed's William Dudley Speaks on Financial Crisis

--

--

USD

18:00

14:00

Fed's John Williams Speaks on Unconventional Monetary Policy

--

--

EUR

20:30

16:30

ECB Presdient Jean-Claude Trichet Speaks on Euro Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

0:00

Conference Board Leading Index (JUL)

--

0.1%

Declines for the second month.

CNY

1:35

MNI Business Sentiment Survey (SEP)

--

59.27

Highest since May.

EUR

6:45

French Consumer Confidence Indicator (SEP)

83

80

Lowest since February 2009.

EUR

6:45

French Own-Company Production Outlook (SEP)

--

4

Confidence weakens for the third straight month.

EUR

6:45

French Production Outlook Indicator (SEP)

--

-29

EUR

6:45

French Business Confidence Indicator (SEP)

100

99

EUR

6:45

French Wages (QoQ) (2Q F)

0.6%

0.6%

Slowest pace of growth since 4Q 2010.

EUR

8:00

Italian Retail Sales s.a. (MoM) (JUL)

0.1%

-0.1%

Declines for the third month.

EUR

8:00

Italian Retail Sales (YoY) (JUL)

-1.0%

-2.4%

GBP

8:30

BBA Loans for House Purchase (AUG)

33250

35226

Highest since May 2010.

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