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Forex: Euro To Falter Ahead Of ECB, Sterling Weighed By Growth Fears

Forex: Euro To Falter Ahead Of ECB, Sterling Weighed By Growth Fears

2011-10-31 13:50:00
David Song, Currency Strategist
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Talking Points

  • Euro: Inflation Holds At 3%, OECD Calls For ECB Rate Cut
  • British Pound: BoE Talks Up Increased Risk Of Double-Dip Recession
  • U.S. Dollar: Benefits From Risk Aversion, FOMC To Maintain Cautious Tone

Euro: Inflation Holds At 3%, OECD Calls For ECB Rate Cut

The Euro slipped to an overnight low of 1.3974 as European policy makers held a cautious outlook for the region, and the single-currency may trade heavy throughout the week as market participants see the central bank taking additional steps to stimulate the ailing economy. The Organization for Economic Cooperation and Development encouraged the European Central Bank to lower the interest rate from 1.00% as the group sees the economy growing 0.3% in 2012 versus an initial forecast for a 2% expansion in the growth rate, and we may see the Governing Council carry its easing cycle into the following year as the region faces a growing risk of a double-dip recession.

According to Credit Suisse overnight index swaps, market participants are pricing a 25% chance for a 25bp rate cut this week, but expectations for lower borrowing costs may gather pace ahead of the rate decision on November 3 as the economic outlook for Europe deteriorates. However, as the headline reading for inflation holds steady at 3.0%, the stickiness in price growth may lead the Governing Council to uphold its current policy throughout the remainder of the year, and the ECB may carry its wait-and-see approach into the following year as the central bank maintains its one and only mandate to ensure price stability. As the EUR/USD gives back the advance from the previous week, the pair may test the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 for near-term support, but the reversal from 1.4246may gather pace ahead of the Group of 20 Summit later this week as the sovereign debt crisis comes into focus.

British Pound: BoE Talks Up Increased Risk Of Double-Dip Recession

The British Pound weakened to 1.5964 following the shift in risk sentiment and the sterling may continue to trade heavy over the near-term as the Bank of Japan maintains a cautious outlook for the region. BoE board member Paul Tucker said a double-dip recession remains ‘within the bounds of possibility’ while speaking with the Times newspaper, and went onto say that the recovery is going to stay soft ‘for a while’ as private sector activity falters. In turn, it seems as though we will see the MPC expand monetary policy further over the coming months, and the central bank may take additional steps in the following year as the committee sees an increased risk of undershooting the 2% target for inflation. As the near-term rally in the GBP/USD tapers off ahead of the 23.6% Fib retracement from the 2009 low to high around 1.6200, we expect the pullback from 1.6151 to gather pace in the days ahead, and the pair may threaten the rebound from 1.5273 as the BoE continues to talk up speculation for additional monetary stimulus.

U.S. Dollar: Benefits From Risk Aversion, FOMC To Maintain Cautious Tone

The U.S. dollar continued to recoup the losses from the previous week, with the Dow Jones-FXCM U.S. Dollar index (Ticker: USDOLLAR) advancing to a high of 9,700, and the greenback should continue to gain ground throughout the North American trade as the U.S. equity market opens lower. As fears surrounding the global economy weigh on market sentiment, we may see the flight to safety gather pace ahead of the G20 Summit, but comments from the group may help to calm market jitters as world policy makers increase their efforts to stimulate growth. However, cautious comments from the FOMC may weigh on the reserve currency as the central bank keeps the door open to expand monetary policy further, and we may see Fed Chairman Ben Bernanke float the idea of conducting another round of quantitative easing as the world’s largest economy faces a risk of slipping back into a recession.

--- 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

13:45

9:45

Chicago Purchasing Manager (OCT)

59.0

60.4

USD

14:30

10:30

Dallas Fed Manufacturing Activity (OCT)

-5.0

-14.4

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Building Permits (MoM) (SEP)

2.0%

-17.1%

Biggest decline since December.

JPY

23:15

Nomura/JMMA Manufacturing Purchasing Manager Index (OCT)

--

50.6

Expands for the seventh time this year.

AUD

23:30

TD Securities Inflation (MoM) (OCT)

--

0.1%

Slowest pace of growth since February 2010.

AUD

23:30

TD Securities Inflation (YoY) (OCT)

--

2.6%

GBP

0:01

Hometrack Housing Survey (MoM) (OCT)

--

-0.2%

Contracts for the sixth straight month.

GBP

0:01

Hometrack Housing Survey (YoY) (OCT)

--

-2.8%

AUD

0:30

Private Sector Credit (MoM) (SEP)

0.3%

0.5%

Rises for the third month.

AUD

0:30

Private Sector Credit (YoY) (SEP)

3.1%

3.4%

NZD

2:00

Money Supply M3 (YoY) (SEP)

--

5.0%

Slowest pace of growth since January.

JPY

5:00

Housing Starts (YoY) (SEP)

8.6%

-10.8%

Biggest decline since December 2009.

JPY

5:00

Annualized Housing Starts (SEP)

0.906M

0.745M

JPY

5:00

Construction Orders (YoY) (SEP)

--

-9.3%

EUR

7:00

German Retail Sales (MoM) (SEP)

1.0%

0.4%

Increases for the fifth time this year.

EUR

7:00

German Retail Sales (YoY) (SEP)

1.6%

0.3%

EUR

7:45

French Producer Prices (MoM) (SEP)

0.1%

0.2%

Rises for the sixth time in 2011.

EUR

7:45

French Producer Prices (YoY) (SEP)

6.1%

6.1%

EUR

9:00

Italian Unemployment Rate s.a. (SEP P)

7.9%

8.3%

Highest since November 2010.

GBP

9:30

Mortgage Approvals (SEP)

50.6K

51.0K

Holds above 50K for the second straight month.

GBP

9:30

Net Consumer Credit (SEP)

0.4B

0.6B

GBP

9:30

Net Lending Sec. on Dwellings (SEP)

0.6B

0.3B

GBP

9:30

M4 Money Supply (MoM) (SEP)

--

-0.4%

Contracts for the second consecutive month.

GBP

9:30

M4 Money Supply (YoY) (SEP)

--

-1.7%

GBP

9:30

M4 Money Supply ex OFCs (Annualised) (3M) (SEP)

--

4.9%

EUR

10:00

Euro-Zone Consumer Price Index Estimate (YoY) (OCT)

2.9%

3.0%

Holds steady for second month.

EUR

10:00

Euro-Zone Unemployment Rate (SEP)

10.0%

10.2%

Highest since 1997.

EUR

10:00

Italian CPI (NIC incl. tobacco) (MoM) (OCT P)

0.1%

0.6%

Fastest pace of growth since October 2008.

EUR

10:00

Italian CPI (NIC incl. tobacco) (YoY) (OCT P)

2.9%

3.4%

EUR

10:00

Italian CPI - EU Harmonized (MoM) (OCT P)

0.6%

0.9%

EUR

10:00

Italian CPI - EU Harmonized (YoY) (OCT P)

3.5%

3.8%

EUR

11:00

Italian Producer Price Index (MoM) (SEP)

0.4%

0.2%

Slows for the first time since June.

EUR

11:00

Italian Producer Price Index (YoY) (SEP)

4.7%

4.7%

CAD

12:30

Gross Domestic Product (MoM) (AUG)

0.2%

0.3%

Expands for the third month.

CAD

12:30

Gross Domestic Product (YoY) (AUG)

2.2%

2.4%

CAD

12:30

Industrial Product Price (MoM) (SEP)

0.2%

0.4%

Increases for second month.

CAD

12:30

Raw Materials Price Index (MoM) (SEP)

-1.9%

1.4%

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