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Forex: Euro Weakness Ahead, Sterling To Consolidate Further

Forex: Euro Weakness Ahead, Sterling To Consolidate Further

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

  • Euro: IMF Sees Recapitalization Plan, ECB Rate Cut On Tap
  • British Pound: BoE To Maintain Current Policy, Sideways Price Action Ahead
  • U.S. Dollar: Recoups Overnight Losses, Service-Based Activity To Slow

Euro: IMF Sees Recapitalization Plan, ECB Rate Cut On Tap

The Euro advanced to a high of 1.3373 as the International Monetary Fund’s European department Director, Antonio Borges, talked up speculation for a European bank recapitalization plan, but the looming European Central Bank interest rate decision continues to cast a bearish outlook for the single-currency as market participants expect to see a rate cut. Mr. Borges said the euro-area needs EUR 100-200B to shore up the banking sector, and went onto say that ‘more should be done on a cross-border basis’ as European policy makers struggle to restore investor confidence.

Meanwhile, the IMF argued that the ECB ‘should lower its policy rate if downside risks to growth and inflation persist,’ and warned that the Governing Council ‘might need to reinstate some of its longer-term liquidity provision operations if stresses on interbank markets intensify further’ in its biannual economic report for Europe. According to Credit Suisse overnight index swaps, market participants are still pricing a 100% chance for a 25bp rate cut tomorrow, and we may see the ECB show an increased willingness to expand its nonstandard measures as the ongoing turmoil within the financial system drags on the economic recovery. In turn, we expect the EUR/USD to consolidate over the next 24-hours of trading, but the exchange rate may threaten the rebound from the beginning of the year (1.2873) as the fundamental outlook for the euro-area deteriorates.

British Pound: BoE To Maintain Current Policy, Sideways Price Action Ahead

The British Pound pared the overnight advance to 1.5491 and the sterling may continue to consolidate over the near-term as market participants weigh the outlook for monetary policy. The Bank of England is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase target at GBP 200B, but we should see the BoE refrain from releasing a statement as the central bank preserves its current policy. Indeed, the downward revision in 2Q GDP spurred speculation that the MPC will expand monetary policy further to mitigate the risk of a double-dip recession, and the committee may carry its easing cycle into the following year as the central bank continues to see a risk of undershooting the 2% target for inflation. As the BoE is scheduled to release the policy meeting minutes on October 19, the GBP/USD should trend sideways over the near-term, but the sterling is likely to face additional headwinds over the remainder of the year as the slowing recovery in the U.K. dampens the outlook for future growth.

U.S. Dollar: Recoups Overnight Losses, Service-Based Activity To Slow

The greenback recouped some of the losses from the overnight trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 10,0017, and the greenback may continue to gain ground during the North American session as risk sentiment appears to be tapering off. As the economic docket is expected to show a slowdown in service-based activity, a decline in the U.S. ISM Non-Manufacturing index could fuel a shift in risk sentiment, and we may see the reserve currency appreciate against its major counterparts should the flight to safety gather pace. Beyond the headline reading, we will keep a close eye on the employment component as U.S. Non-Farm Payrolls are on tap for Friday, and the greenback may consolidate heading into the end of the week as investors weigh the outlook for the world’s largest economy.

--- 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

USD

14:00

10:00

ISM Non-Manufacturing Composite (SEP)

52.8

53.3

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (SEP 30)

1500K

1915K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (SEP 30)

1500K

791K

USD

14:30

10:30

DOE U.S. Distillate Inventory (SEP 30)

-300K

72K

Currency

GMT

Release

Expected

Actual

Comments

AUD

22:30

AiG Performance of Service Index (SEP)

--

50.3

Expands for second month.

GBP

23:01

BRC Shop Price Index (YoY) (SEP)

--

2.7%

Weakens for third month.

AUD

0:30

Retail Sales s.a. (MoM) (AUG)

0.2%

0.6%

Rises for second month.

EUR

7:45

Italian PMI Services (SEP)

47.0

45.8

Service-based activity contracts for the first time since July 2009.

EUR

7:50

French PMI Services (SEP F)

52.5

51.5

EUR

7:55

German PMI Services (SEP F)

50.3

49.7

EUR

8:00

Euro-Zone PMI Services (SEP F)

49.1

48.8

EUR

8:00

Euro-Zone PMI Composite (SEP F)

49.2

49.1

GBP

8:30

PMI Services (SEP)

50.5

52.9

Expands for nine straight months.

GBP

8:30

Official Reserves (Changes) (SEP)

--

-$2444M

Lowest since the series began in 1996.

GBP

8:30

Gross Domestic Product (QoQ) (2Q F)

0.2%

0.1%

Slowest pace of growth since the contraction in 4Q 2010, consumption falls the most since 1Q 2009.

GBP

8:30

Gross Domestic Product (YoY) (2Q F)

0.7%

0.6%

GBP

8:30

Private Consumption (2Q)

-0.3%

-0.8%

GBP

8:30

Gross Fixed Capital Formation (2Q)

0.7%

1.7%

GBP

8:30

Government Spending (2Q)

-0.1%

1.1%

GBP

8:30

Exports (2Q)

-0.1%

-1.3%

GBP

8:30

Imports (2Q)

-1.0%

-0.3%

GBP

8:30

Total Business Investment (QoQ) (2Q)

--

11.6%

Biggest advance since 2Q 2005.

GBP

8:30

Total Business Investment (YoY) (2Q)

--

3.8%

EUR

9:00

Euro-Zone Retail Sales (MoM) (AUG)

-0.3%

-0.3%

Declines for the third time this year.

EUR

9:00

Euro-Zone Retail Sales (YoY) (AUG)

-0.7%

-1.0%

USD

11:00

MBA Mortgage Applications (SEP 30)

--

-4.3%

Falls for the second time in September.

USD

11:30

Challenger Job Cuts (YoY) (SEP)

--

211.5%

Largest rise in January 2009.

USD

12:15

ADP Employment Change (SEP)

73K

91K

Holds below 100K for second month.

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