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Forex: Euro Rally To Taper Off, FOMC Minutes In Focus

Forex: Euro Rally To Taper Off, FOMC Minutes In Focus

2011-10-12 13:50:00
David Song, Currency Strategist
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Talking Points

  • Euro: Slovakia To Push Second Vote On EFSF, ECB Scales Back Hawkish Tone
  • British Pound: Hits Fresh Monthly High, Consolidation Ahead
  • U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC Minutes

Euro: Slovakia To Push Second Vote On EFSF, ECB Scales Back Hawkish Tone

Indeed, France pledge to aid its commercial banks that are unable to tap the financial markets, and we may see the EU take additional steps to support the financial system in an effort to stem the risk of a double-dip recession. At the same time, law makers in Slovakia are in talks about holding another vote on the European Financial Stability Facility, which is expected to take place in the coming days, and the increased effort to address the sovereign debt crisis should help to keep the Euro afloat as trader sentiment improves.

Meanwhile, the Organization for Economic Cooperation and Development floated the idea of lower borrowing costs in Europe, with Secretary General Angel Gurria noting that the European Central Bank has room to lower the interest rate from 1.50%, and we may see the Governing Council continue to scale back its hawkish tone for monetary policy as the region faces a slowing recovery. ECB board member Ewald Nowotny said he’s more concerned about a ‘relatively long phase of weaker growth’ rather than the risk for inflation, and the central bank may show an increased willingness to scale back the rate hikes from earlier this year as the fundamental outlook for Europe deteriorates. Speculation for lower borrowing costs certainly dampens the appeal of the single-currency, and the relief rally in the EUR/USD may taper off in the days ahead as interest rate expectations falter. As the EUR/USD works its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, we may see the pair test the ‘golden ratio’ for resistance, and the exchange rate may consolidate over the near-term as market participants weigh the outlook for monetary policy.

British Pound: Hits Fresh Monthly High, Consolidation Ahead

The British Pound continued to recoup the losses from the previous month, with the exchange rate advancing to a fresh daily high of 1.5779, but the sterling may face headwinds in the following week should the Bank of England meeting minutes highlight an increased willingness to expand monetary policy further. Former BoE board member Sushil Wadhwani encouraged the central bank to conduct ‘more creative’ forms of policy to shore up the ailing economy, and we may see the MPC carry its easing cycle into the following year as Governor Mervyn King sees an increased risk of undershooting the 2% target for inflation. Speculation for additional monetary stimulus would instill a bearish outlook for the sterling and the GBP/USD may consolidate over the remainder of the week as market participants weigh the prospects for future policy. In turn, the pound-dollar may give back the rebound from 1.5273, and the exchange rate may fall back towards the 50.0% Fibonacci retracement from the 2009 low to high around 1.5250 as speculation for additional monetary support intensifies.

U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC Minutes

The greenback weakened against most of its major counterparts during the overnight trade, and the reserve currency may continue to lose ground throughout the North American session as market participants increase their appetite for yields. As equity futures foreshadow a higher open for the U.S. market, the rise in risk may gather pace during the day, but comments from the Federal Reserve may weigh on trader sentiment should the central bank turn increasingly cautious towards the world’s largest economy. The FOMC meeting minutes is likely to highlight the ongoing weakness within the real economy, and the committee may keep the door open to conduct another round of quantitative easing as the U.S. faces a growing risk of a double-dip recession. In turn, we may see the policy statement spark a shift in risk sentiment, and a drop in risk appetite should fuel a rebound in the reserve currency as it benefits from safe-haven flows.

--- 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.

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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

18:00

14:00

Federal Open Market Committee Meeting Minutes

--

--

Currency

GMT

Release

Expected

Actual

Comments

GBP

14:00

NIESR Gross Domestic Product Estimate (SEP)

--

0.5%

Increases for the seventh month.

NZD

22:00

REINZ House Sales (YoY) (SEP)

--

21.1%

Holds steady for second month.

NZD

22:00

REINZ Housing Price Index (SEP)

--

3279.2

Increases for the second month.

NZD

22:00

REINZ Housing Price Index (MoM) (SEP)

--

1.7%

NZD

23:00

QV House Prices (YoY) (SEP)

--

0.7%

Biggest rise since October 2010.

AUD

23:30

Westpac Consumer Confidence (OCT)

--

0.4%

Rises for the second straight month.

AUD

23:30

Westpac Consumer Confidence Index (OCT)

--

97.2

JPY

23:50

Machine Orders (MoM) (AUG)

3.9%

11.0%

Largest advance since August 2010.

JPY

23:50

Machine Orders (YoY) (AUG)

-3.6%

2.1%

AUD

0:30

Home Loans (AUG)

1.0%

1.2%

Increases for the fifth consecutive month.

AUD

0:30

Investment Lending (AUG)

--

1.8%

AUD

0:30

Value of Loans (MoM) (AUG)

--

0.6%

EUR

5:30

French Consumer Price Index (MoM) (SEP)

0.1%

0.0%

Headline reading for inflation holds steady for second month.

EUR

5:30

French Consumer Price Index (YoY) (SEP)

2.5%

2.4%

EUR

5:30

French CPI - EU Harmonised (MoM) (SEP)

0.1%

-0.1%

EUR

5:30

French CPI - EU Harmonised (YoY) (SEP)

2.5%

2.2%

EUR

5:30

French CPI Ex Tobacco Index (SEP)

122.91

122.49

EUR

6:00

German Wholesale Price Index (MoM) (SEP)

--

0.3%

Rises for second month.

EUR

6:00

German Wholesale Price Index (YoY) (SEP)

--

5.7%

EUR

6:45

French Current Account (euros) (AUG)

--

-2.9B

Smallest deficit since October 2010.

GBP

8:30

Jobless Claims Change (SEP)

24.0K

17.5K

Increases for the seventh month.

GBP

8:30

Claimant Count Rate (SEP)

5.0%

5.0%

GBP

8:30

ILO Unemployment Rate (3M) (AUG)

8.0%

8.1%

GBP

8:30

Average Weekly Earnings inc Bonus (3MoY) (AUG)

2.8%

2.8%

Slows for the first time since April.

GBP

8:30

Average Weekly Earnings ex Bonus (3MoY) (AUG)

1.9%

1.8%

EUR

9:00

Euro-Zone Industrial Production s.a. (MoM) (AUG)

-0.8%

1..2%

Increases for the second consecutive month.

EUR

9:00

Euro-Zone Industrial Production w.d.a. (YoY) (AUG)

2.1%

5.3%

USD

11:00

MBA Mortgage Applications (OCT 7)

--

1.3%

Rises for the fourth time in the last six weeks.

CAD

12:30

New Housing Price Index (MoM) (AUG)

0.1%

0.1%

Increases for the fifth month.

CAD

12:30

New Housing Price Index (YoY) (AUG)

2.3%

2.3%

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