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Forex: USD Rally At Risk, Euro Outlook Remains Bearish On ECB

Forex: USD Rally At Risk, Euro Outlook Remains Bearish On ECB

2011-10-04 13:05:00
David Song, Currency Strategist
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Talking Points

  • U.S. Dollar: Benefits From Flight To Safety, Chairman Bernanke On Tap
  • Euro: Remains Oversold, Further Weakness Ahead
  • British Pound: Eyes 50.0% Fib, Range-Bound Price Action Ahead

U.S. Dollar: Benefits From Flight To Safety, Chairman Bernanke On Tap

The greenback continued to gain ground against its major counterparts, which pushed the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) to a high of 10,120, and we should see the rise in risk aversion carry into the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for the rest of the day, risk trends should heavily influence price action for the major currencies, but comments from Fed Chairman Ben Bernanke could spark a shift in trader sentiment as market participants weigh the outlook for monetary policy. As Mr. Bernanke is scheduled to testify in front of Congress, the central bank may keep the door open to conduct another round of quantitative easing, and speculation for additional monetary support may dampen the appeal of the greenback as the FOMC looks to prolong its easing cycle. In turn, we may see a near-term correction unfold ahead of Friday’s Non-Farm Payrolls report, but we may see the shift away from risk-taking behavior continue to materialize over the remainder of the year as the fundamental outlook for the global economy deteriorates.

Euro: Remains Oversold, Further Weakness Ahead

The Euro pared the overnight decline to 1.3145 as the EU increased its pledge to address the sovereign debt crisis, but the rebound may be short-lived as the ongoing turmoil within the financial system dampens the outlook for the region. Indeed, the European Central Bank saw overnight deposits from commercial banks reach the highest level since July 2010, and we may see the ECB take additional steps to shore up the real economy as the fundamental outlook for Europe turns increasingly bleak. In turn, the Governing Council is widely expected to scale back the rate hikes from earlier this year, and the recent selloff in the EUR/USD may gather pace as interest rate expectations falter. The rebound in the euro-dollar is likely to be short-lived as the relative strength index remains in oversold territory, and we may see the exchange rate continue to fall back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as it searches for near-term support.

British Pound: Eyes 50.0% Fib, Range-Bound Price Action Ahead

The British Pound extended the decline from the previous day to reach a fresh weekly low of 1.5366 and the sterling looks poised to threaten the rebound from 1.5327 as the fundamental outlook for the U.K. remains weak. The growing risk of a double-dip recession continues to spur expectations for additional monetary support, and the Bank of England may show an increased willingness to expand its asset purchase program beyond the GBP 200B target in order to stimulate the ailing economy. As the GBP/USD caries out a near-term top around the 38.2% Fib from the 2009 low to high around 1.5680-1.5700, the pair may come up against the 50.0% Fib around 1.5250, but we may see the pound-dollar consolidate over the near-term as market participants look forward to the BoE minutes, which are due out on October 19.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Will the EUR/USD Retrace The Advance From Earlier This Year? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

13:00

9:00

ECB President Jean-Claude Trichet Testifies To European Parliament

--

--

USD

14:00

10:00

Fed Chairman Ben Bernanke Testifies Before Congress

--

--

USD

14:00

10:00

Factory Orders (AUG)

0.0%

2.4%

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Monetary Base (YoY) (SEP)

--

16.7%

Rises for second month.

AUD

0:30

Trade Balance (Australian dollar) (AUG)

2000M

3100M

Largest surplus since June 2010.

AUD

0:30

Building Approvals (MoM) (AUG)

1.0%

11.4%

Biggest advance since March 2010.

AUD

0:30

Building Approvals (YoY) (AUG)

-15.1%

-5.5%

JPY

1:30

Labor Cash Earnings (YoY) (AUG)

--

-0.6%

Falls for the third month.

AUD

3:30

Reserve Bank of Australia Interest Rate Decision

4.75%

4.75%

Softens hawkish tone, sees scope for monetary support.

AUD

5:30

RBA Commodity Price Index (SEP)

--

115.4

Holds below 30% for the fifth month.

AUD

5:30

RBA Commodity Index SDR (YoY) (SEP)

--

26.6%

GBP

8:30

Purchasing Manager Index Construction (SEP)

51.6

50.1

Lowest since December 2010.

EUR

9:00

Euro-Zone Producer Price Index (MoM) (AUG)

-0.2%

-0.1%

Contracts for the second time this year.

EUR

9:00

Euro-Zone Producer Price Index (YoY) (AUG)

5.8%

5.9%

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