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Forex: Euro, British Pound Correction To Be Short-Lived

Forex: Euro, British Pound Correction To Be Short-Lived

2011-09-26 13:05:00
David Song, Currency Strategist
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Talking Points

  • Euro: ECB To Cut Rate, Restart Covered-Bond Purchases
  • British Pound: BoE Talks Up Speculation For More QE
  • U.S. Dollar: Weighed By Risk Appetite, New Home Sales On Tap

Euro: ECB To Cut Rate, Restart Covered-Bond Purchases

Indeed, European Central Bank board member Ewald Nowotny floated the idea of scaling back the benchmark interest rate from 1.50%, but went onto say that the ECB shouldn’t ‘expand its toolkit beyond its current scope’ during an interview with Market News International. However, there’s speculation that the Governing Council may vote on reestablishing its covered-bond purchases at the next policy meeting on October 6, and the central bank may employ a range of tools to shore up the ailing economy as the outlook for growth and inflation deteriorates.

According to Credit Suisse overnight index swaps, market participants are pricing a 50bp rate cut for the following month, and speculation for lower borrowing costs reinforce a bearish outlook for the single-currency as policy makers struggle to restore investor confidence. In turn, we are likely to see the EUR/USD trade heavy over the near-term, and the pair may threaten the rebound from the beginning of the year (1.2873) as fears surrounding the sovereign debt crisis curbs risk-taking behavior. However, as the relative strength index bounces back from oversold territory, the technicals foreshadow a near-term correction on the horizon, and we may see the euro-dollar turn higher before it resumes the sharp selloff carried over from August.

British Pound: BoE Talks Up Speculation For More QE

The British Pound advanced to 1.5542 following the shift in market sentiment, but the near-term correction may fail to gather momentum as the Bank of England talks up speculation for additional monetary support. BoE board member Ben Broadbent said he was ‘reasonably close’ to voting for more quantitative easing, and casted a dour outlook for the region as he expects the ‘disinflationary’ environment to dampen the recovery. The growing rift within the MPC certainly raises the risk of seeing the Asset Purchase Facility exceed the current GBP 200B target before the end of the year, and the committee may look at additional tools to shore up the economy in an effort to stem the risks for a double-dip recession. Nevertheless, it seems as though we will see the rebound from 1.5327gather pace as the RSI trades back above 30, but we may see the GBP/USD continue to trade heavy over the near-term as the fundamental outlook for the U.K. deteriorates.

U.S. Dollar: Weighed By Risk Appetite, New Home Sales On Tap

The U.S. dollar struggled to hold its ground during the overnight trade and the reserve currency may weaken further during the North American trade as market participants increase their appetite for yields. As equity futures foreshadow a higher open for the U.S. market, we may see the rise in risk sentiment gather pace throughout the remainder of the day, but another drop in New Home sales may weigh on trader sentiment as the data instills a weakened outlook for future growth. In turn, we may see market conditions turn around later today, and the greenback may regain its footing as it benefits from safe-haven flows.

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

14:00

10:00

New Home Sales (MoM) (AUG)

-1.0%

-0.7%

USD

14:00

10:00

New Home Sales (AUG)

295K

298K

USD

14:30

10:30

Dallas Fed Manufacturing Activity (SEP)

-8

-11.4

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:45

Trade Balance (New Zealand dollars) (AUG)

-321M

-641M

Largest deficit since August 2009 as imports increased the most since December 2008.

NZD

22:45

Exports (New Zealand dollars) (AUG)

3.44B

3.44B

NZD

22:45

Imports (New Zealand dollars) (AUG)

3.78B

4.08B

NZD

22:45

Balance (YTD) (New Zealand dollars) (AUG)

1400

1084

EUR

8:00

German IFO - Expectations (SEP)

97.3

98.0

Expectations slip to the lowest since July 2009.

EUR

8:00

German IFO - Business Climate (SEP)

106.5

107.5

EUR

8:00

German IFO - Current Assessment (SEP)

115.7

117.9

EUR

8:00

Italian Consumer Confidence Index s.a. (SEP)

98.5

98.5

Lowest since July 2008.

USD

12:30

Chicago Fed National Activity Index (AUG)

-0.37

-0.43

Fifth negative print in 2011.

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