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Forex: Euro Poised For Correction, Sterling Weighed By Dovish BoE

Forex: Euro Poised For Correction, Sterling Weighed By Dovish BoE

2011-10-27 14:25:00
David Song, Currency Strategist
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Talking Points

  • Euro: ESFS To Reach EUR 1T, 50% Haircut For Greek Bonds
  • British Pound: Holds Below 200-Day SMA, BoE Sees Risk Of Double-Dip Recession
  • U.S. Dollar: 3Q GDP Fuels Risk Appetite, RSI Dips Below 30

Euro: ESFS To Reach EUR 1T, 50% Haircut For Greek Bonds

The Euro surged to a fresh monthly high of 1.4145 as the EU laid out a more credible plan to address the sovereign debt crisis, and the single-currency may continue to retrace the sharp decline from the previous month as policy makers increase their efforts to stem the risk for contagion. Indeed, the EU pledged to increase the European Financial Stability Facility to EUR 1 trillion while implementing a 50 percent discount on Greek bonds, but it seems as though the group has become increasingly reliant on the European Central Bank’s asset purchase program as policy makers encourage the Governing Council to maintain its nonstandard measures.

Meanwhile, ECB board member Jens Weidmann warned that some of the details from the summit are still unclear, and argued that the Greek haircut cannot set precedence in the euro-area as members of the monetary union face higher financing costs. In turn, there could be increased pressure on the Governing Council to expand in nonstandard measures further, and the central bank may carry its easing cycle into the following year as the region faces an increased risk of a double-dip recession. As the fundamental outlook for the euro-area remains weak, the recent rally in the EUR/USD may be overdone, and we should get a near-term correction in the days ahead as the relative strength index approaches overbought territory. However, if the RSI pushes above 70, we may see the euro-dollar extend the rebound from 1.3145, and the exchange rate may make a run at the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-50 as market participants increase their appetite for risk.

British Pound: Holds Below 200-Day SMA,BoE Sees Risk Of Double-Dip Recession

The British Pound broke out of the narrow range from earlier this week to reach a high of 1.6082, and the GBP/USD may work its way back towards the 23.6% Fib from the 2009 low to high around 1.6200-20 as market sentiment improves. However, Bank of England Markets Director Paul Fisher talks up speculation for additional monetary support as the region faces a slowing recovery and said that there’s a ‘significant’ risk of seeing another recession as policy makers expect growth to hold relatively flat in the fourth quarter. As the BoE keeps the door open to expand policy further, speculation for more QE is likely to bear down on the exchange rate, and we may see a large correction unfold in the coming days as long as the relative strength index continues to hold below 70. As the GBP/USD struggles to push back above the 200-Day SMA at 1.6136, we may see the exchange rate fall back towards the 38.2% Fib around 1.5680-1.5700 to test for near-term support, but the sterling may give back the advance from earlier this month as market participants increase speculation for more QE.

U.S. Dollar: 3Q GDP Fuels Risk Appetite, RSI Dips Below 30

The U.S. dollar sold off on Thursday following the rise in market sentiment, and the greenback may continue to lose ground throughout the North American trade as the U.S. equity market opens sharply higher. As the positive 3Q GDP print fuels the risk appetite, we may see market participants continue to diversify away from the greenback, but we may see a near-term correction unfold over the next 24-hours of trading as the USD remains oversold. As the relative strength index on the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) dips below 30, we may see the greenback trade heavy throughout the day, but we should get a good bounce in the reserve currency once the oscillator bounces back from oversold territory.

--- 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

Pending Home Sales (MoM) (SEP)

0.3%

-1.2%

USD

14:00

10:00

Pending Home Sales (YoY) (SEP)

10.8%

13.1%

USD

15:00

11:00

Kansas City Fed Manufacturing Activity Index (OCT)

8

6

Currency

GMT

Release

Expected

Actual

Comments

NZD

20:00

Reserve Bank of New Zealand Interest Rate Decision

2.50%

2.50%

Sees increased price pressures leading to higher interest rates.

NZD

21:45

Trade Balance (New Zealand dollars) (SEP)

-440M

-751M

Biggest deficit since October 2008 as imports rose the most since November 2008.

NZD

21:45

Balance (YTD) (New Zealand dollars) (SEP)

1065

724

NZD

21:45

Exports (New Zealand dollars) (SEP)

3.51B

3.44B

NZD

21:45

Imports (New Zealand dollars) (SEP)

3.90B

4.19B

JPY

23:50

Retail Trade s.a. (MoM) (SEP)

-0.5%

-1.5%

Contracts for the third consecutive month.

JPY

23:50

Retail Trade (YoY) (SEP)

-0.1%

-1.2%

JPY

23:50

Large Retailers' Sales (SEP)

-2.5%

-3.6%

CNY

2:00

Industrial Profits (YTD) (YoY) (SEP)

--

27.0%

Slowest pace of growth since November 2009.

JPY

4:31

Bank of Japan Interest Rate Decision

0.10%

0.10%

Expands credit program by JPY 5T.

EUR

8:00

Euro-Zone M3 s.a. (3M) (SEP)

2.6%

2.6%

Fastest pace of growth since August 2009.

EUR

8:00

Euro-Zone M3 s.a. (YoY) (SEP)

2.8%

3.1%

EUR

9:00

Euro-Zone Economic Confidence (OCT)

93.8

94.8

Confidence weakens for the eighth consecutive month, dampening the outlook for growth.

EUR

9:00

Euro-Zone Business Climate Indicator (OCT)

-0.20

-0.18

EUR

9:00

Euro-Zone Consumer Confidence (OCT F)

-19.9

-19.9

EUR

9:00

Euro-Zone Industrial Confidence (OCT)

-7.0

-6.6

EUR

9:00

Euro-Zone Services Confidence (OCT)

-1.0

0.2

GBP

10:00

CBI Reported Sales (OCT)

-16

-11

Holds in negative territory for the fifth month.

EUR

12:00

German CPI (MoM) (OCT P)

0.1%

0.0%

Price growth slows for the first time since May.

EUR

12:00

German CPI (YoY) (OCT P)

2.6%

2.5%

EUR

12:00

German CPI - EU Harmonised (MoM) (OCT P)

0.0%

0.0%

EUR

12:00

German CPI - EU Harmonised (YoY) (OCT P)

2.8%

2.8%

USD

12:30

Gross Domestic Product (Annualized) (3Q A)

2.5%

2.5%

Fastest pace of growth since 3Q 2010.

USD

12:30

Personal Consumption (3Q A)

1.9%

2.4%

USD

12:30

Gross Domestic Product Price Index (3Q A)

2.4%

2.5%

USD

12:30

Core Personal Consumption Expenditure (QoQ) (3Q A)

2.2%

2.1%

USD

12:30

Initial Jobless Claims (OCT 22)

401K

402K

Holds above 400K for the fourth week.

USD

12:30

Continuing Claims (OCT 15)

3700K

3645K

Lowest since September 2008.

USD

13:45

Bloomberg Consumer Comfort Index (OCT 23)

-49.0

-51.1

Lowest since the last week of September.

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