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Forex: Euro Reversal On Tap, Sterling Pares Decline Ahead Of U.K. CPI

Forex: Euro Reversal On Tap, Sterling Pares Decline Ahead Of U.K. CPI

2011-10-17 13:20:00
David Song, Currency Strategist
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Talking Points

  • Euro: G20 Meeting Disappoints, Rebound From 1.3145 At Risk
  • British Pound: Pares Overnight Decline, To Benefit From Higher Inflation
  • U.S. Dollar: Benefits From Risk Aversion, USD Index Finds Support

Euro: G20 Meeting Disappoints, Rebound From 1.3145 At Risk

The EUR/USD slipped to an overnight low of 1.3765 as the G20 meeting in Paris failed to instill a positive outlook for Europe and the single-currency may face additional headwinds this week as fears surrounding the sovereign debt crisis bears down on market sentiment. In turn, it seems as though the euro-dollar may have carved out a near-term top around the 61.8% Fibonacci from the 2009 high to the 2010 low at 1.3880-1.3900, and the pair may give back the rebound from 1.3145 as the fundamental outlook for the euro-area turns increasingly bleak.

Indeed, European policy makers floated different ideas on tackling the debt crisis, with Governing Council board member Christian Noyer stating that the central bank stands ready to act when necessary and we may see the ECB take additional steps to shore up the ailing economy as the EU struggles to meet on common ground. As the region faces an increased risk of a double-dip recession, the ECB may have little choice but to scale back the rate hikes from earlier this year, and the bank may also continue to expand its nonstandard measures as the heightening risk for contagion bears down on the banking sector. As a result, the pullback from 1.3913 may turn into a larger correction over the coming days, and the EUR/USD may work its way back towards the 38.2% Fib around 1.3100 ahead of the EU Summit on October 23 as the economic outlook for Europe remains clouded with high uncertainty.

British Pound: Pares Overnight Decline, To Benefit From Higher Inflation

The British Pound pared the overnight decline to 1.5730, but the sterling may struggle to hold its ground over the next 24-hours of trading as market participants scale back their appetite for risk. However, as the economic docket is expected to show heightening price pressures in Britain, a rise in the consumer price index may spark a bullish reaction in the GBP/USD, and we may see the sterling consolidate in the days ahead as the Bank of England is scheduled to release its meeting minutes on the 19th. The policy statement may instill a bearish outlook for the sterling should the central bank maintain a dovish tone for monetary policy, and the pound-dollar may threaten the rebound from 1.5273 if we see the MPC keep the door open to expand its asset purchase target further. As the BoE sees an increased risk of undershooting the 2% target for inflation, the central bank may show an increased willingness to carry its easing cycle into the following year, and dovish comments from the committee is likely to weigh on the exchange rate as market participants weigh the prospects for future policy.

U.S. Dollar: Benefits From Risk Aversion, USD Index Finds Support

The U.S. dollar regained its footing on Monday following the shift in market sentiment, and risk trends should continue to dictate price action for the currency market as the economic docket remains fairly light for the remainder of the day. As equity futures foreshadow a lower open for the U.S. market, the rise in risk aversion looks poised to carry into the North American trade, and the Dow-Jones U.S. Dollar index (Ticker: USDOLLAR) looks poised to trend higher in the days ahead as it appears to have found near-term support around the 38.2% Fib at 9,708.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:15

9:15

Industrial Production (SEP)

0.2%

0.2%

USD

13:15

9:15

Capacity Utilization (SEP)

77.5%

77.4%

CAD

14:30

10:30

Business Outlook Future Sales (3Q)

--

20.0

CAD

14:30

10:30

Bank of Canda Senior Loan Officer Survey (3Q)

--

-49.6

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:30

Performance Services Index (SEP)

--

53.2

Slows for the third month.

GBP

23:01

Rightmove House Prices (MoM) (OCT)

--

2.8%

Biggest rise since February.

GBP

23:01

Rightmove House Prices (YoY) (OCT)

--

1.2%

AUD

0:30

New Motor Vehicle Sales (MoM) (SEP)

--

-1.5%

Contracts for the first time since May.

AUD

0:30

New Motor Vehicle Sales (YoY) (SEP)

--

1.3%

JPY

4:30

Industrial Production (MoM) (AUG F)

--

0.6%

Increases for the fifth consecutive month.

JPY

4:30

Industrial Production (YoY) (AUG F)

--

0.4%

JPY

4:30

Capacity Utilization (MoM) (AUG F)

--

2.4%

CAD

12:30

International Securities Transactions (Canadian dollar) (AUG)

10.000B

7.92B

Marks the seventh surplus this year.

USD

12:30

Empire Manufacturing (OCT)

-4.00

-8.48

Holds at minus 8 for the second month.

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