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Forex: Euro To Weaken Further, Sterling Outlook Hinges On BoE

Forex: Euro To Weaken Further, Sterling Outlook Hinges On BoE

2011-10-24 14:05:00
David Song, Currency Strategist
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Talking Points

  • Euro: EU Summit Disappoints, ECB Says Accommodative Policy ‘At The Limit’
  • British Pound: Falls Back From Fresh Monthly High, BoE To Maintain Dovish Tone
  • U.S. Dollar: Index Extends Decline, To Benefit From Risk Aversion

Euro: EU Summit Disappoints, ECB Says Accommodative Policy ‘At The Limit’

The Euro tumbled to an overnight low of 1.3821 as the EU scaled back talks of leveraging the rescue fund through the European Central Bank and the single-currency may continue to trade heavy ahead of the next meeting schedule for Wednesday as the fundamental outlook for Europe deteriorates. At the same time, Euro Group President Jean-Claude Juncker warned Greek bondholders may face up to a 60 percent haircut as the 21 percent discount discussed back in July ‘will clearly not be enough,’ and talks surrounding private-sector involvement will come under increased scrutiny as policy makers try to avoid a Greek default.

In response, ECB board member Christian Noyer said that the central bank is ‘at the limit’ of what it can do under its mandate, but the Governing Council may have little choice but to scale back the rate hikes from earlier this year as the region faces a growing risk of a double-dip recession. Indeed, it seems as though the Summit scheduled for later this week will do little to prop up market sentiment, and the pullback from 1.3952 may gather pace in the days ahead as hopes of finding a quick fix deteriorate. In turn, we may see the EUR/USD give back the advance from the previous week, and the exchange rate may fall back towards the 50.0 percent Fibonacci retracement from the 2009 high to the 2010 low around 1.3490-1.3500 to test for near-term support.

British Pound: Falls Back From Fresh Monthly High, BoE To Maintain Dovish Tone

The British Pound failed to maintain the advance to 1.5999 and the sterling may continue to give back the rebound from earlier this month as market participants scale back their appetite for risk. The shift in trader sentiment should continue to carry the GBP/USD lower over the next 24-hours of trading and the exchange rate may find near-term support around former resistance, which lies at the 38.2 percent Fib retracement from the 2009 low to high around 1.5680-1.5700. However, upcoming comments from the Bank of England may heighten the bearish sentiment underling the British Pound, and the exchange rate may threaten the rally from 1.5273 should the central bank show an increased willingness to expand monetary policy further. As the BoE looks to carry its easing cycle into 2012, the sterling may trade heavy throughout the remainder of the year, and we may see the MPC step up its efforts to stimulate the ailing economy in an effort to stem the risk of slipping back into a recession.

U.S. Dollar: Index Extends Decline, To Benefit From Risk Aversion

U.S. dollar price action was largely mixed during the overnight trade, but we may see the reverse currency struggle to hold its ground throughout the North American trade as there appears to be a rebound in market sentiment. As the U.S. equity market opens higher, we may see currency traders increase their appetite for risk, and the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) may extend the decline from 10,134 as market participants diversify away from the greenback. However, the rebound in risk may be short-lived as the uncertainties surrounding the global economy dampens the outlook for future growth, and we may see the USD continue to recoup the losses carried over from the previous week as fears surrounding the European debt crisis intensify.

--- 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

No Scheduled Releases

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Adjusted Merchandise Trade Balance (Yen) (SEP)

-121.1B

-21.8B

Smallest deficit since March, exports increased for the second month.

JPY

23:50

Merchandise Trade Balance Total (Yen) (SEP)

198.0B

300.4B

JPY

23:50

Merchandise Trade Exports (YoY) (SEP)

1.0%

2.4%

JPY

23:50

Merchandise Trade Imports (YoY) (SEP)

13.0

12.1%

AUD

0:30

Producer Price Index (QoQ) (3Q)

0.8%

0.6%

Slowest pace of annualized growth since 4Q 2010.

AUD

0:30

Producer Price Index (YoY) (3Q)

2.9%

2.7%

CNY

2:30

HSBC Flash Purchasing Manager Index Manufacturing (OCT)

--

51.1

Expands for the first time since June.

JPY

5:00

Supermarket Sales (YoY) (SEP)

--

-3.6%

Declines for the second month.

EUR

7:00

French PMI Manufacturing (OCT P)

48.0

49.0

Manufacturing contracts for third month.

EUR

7:00

French PMI Services (OCT P)

50.4

46.0

EUR

7:30

German PMI Manufacturing (OCT A)

50.0

48.9

Service-based activity expands for the ninth time this year.

EUR

7:30

German PMI Services (OCT A)

49.9

52.1

EUR

8:00

Euro-Zone PMI Manufacturing (OCT A)

48.0

47.3

Lowest reading since July 2009.

EUR

8:00

Euro-Zone PMI Services (OCT A)

48.5

47.2

EUR

8:00

Euro-Zone PMI Composite (OCT A)

48.8

47.2

EUR

9:00

Euro-Zone Industrial New Orders s.a. (MoM) (AUG)

0.1%

1.9%

Biggest advance since May.

EUR

9:00

Euro-Zone Industrial New Orders (YoY) (AUG)

5.8%

6.2%

USD

12:30

Chicago Fed National Activity Index (SEP)

-0.10

-0.22

Holds in negative territory for second month.

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