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Euro Relief Rally To Be Short-Lived, British Pound Maintains Range

Euro Relief Rally To Be Short-Lived, British Pound Maintains Range

2011-12-09 14:05:00
David Song, Currency Strategist
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Talking Points

  • Euro: EU Unveils New Fiscal Pact, Moody’s Cuts Rating On French Banks
  • British Pound: Producer Price Inflation Cools, Further Easing Ahead
  • U.S. Dollar: Index Carves Higher Low, U. of Michigan Confidence Survey On Tap

Euro: EU Unveils New Fiscal Pact, Moody’s Cuts Rating On French Banks

The Euro rallied to 1.3433 as 23 of the 27 EU members agreed on a new fiscal pact, which would limit government spending and borrowing across the region, but the rebound is likely to be short-lived as hopes of seeing a near-term fix tapers off.At the same time, the group announced plans to launch the permanent bailout fund a year ahead of schedule given the ongoing turmoil in the financial system, while German Chancellor Angela Merkel talked down speculation of increasing the scope of the European Stability Mechanism as the group plans to make an additional $268B in resources available throughout the International Monetary Fund.

Nevertheless, Moody’s Investor Services lowered its credit-rating for BNP Paribas, Societe Generale and Groupe Credit Agricole in light of the weakening outlook for the euro-area, and the ongoing turmoil in the financial system will continue to bear down on the exchange rate as European policy makers struggle to struggle to restore confidence. As Europe struggles to get its house in order, there were talks that the European Central Bank bought Spanish and Portuguese government debt, and we are likely to see the Governing Council take additional steps to shore up the real economy as the region braces for a ‘mild recession.’ As we expect the ECB to carry its easing cycle into the following year, expectations for additional monetary support instills a bearish outlook for the EUR/USD, and the exchange rate looks poised to threaten the rebound from 1.3145 as the fundamental outlook for the euro-area remains bleak. In turn, the reversal from 1.3548 should gather pace in the coming days, and we may see the pair make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as optimism surrounding the EU Summit deteriorates.

British Pound: Producer Price Inflation Cools, Further Easing Ahead

The British Pound struggled to maintain the overnight advance to1.5734 following a shift in trader sentiment, and the sterling may weaken further during the North American trade should we see market participants aggressively scale back their appetite for risk. In light of the recent developments coming out of the U.K., the slowdown in producer prices certainly opens the door for more monetary easing, and the Bank of England minutes due out on December 21 could highlight an increased willingness to expand the asset purchase program beyond the GBP 275B target as policy makers see a heightening risk of undershooting the 2% target. As market participants weigh the outlook for monetary, the GBP/USD should continue to trend sideways in the days ahead, but the exchange rate appears to be carving a near-term top just below 1.5800, which could ultimately lead the pound-dollar to give back the rebound from 1.5270.

U.S. Dollar: Index Carves Higher Low, U. of Michigan Confidence Survey On Tap

The greenback recouped the losses from the overnight trade as market participants turned increasingly skeptical of the new accord announced by the EU, but we may see the reserve currency struggle throughout the North American session as the U.S. equity market opens higher. As risk appetite appears to be flowing back into the foreign exchange market, we may see market participants move away from the USD, but the reserve currency should appreciate further in the days ahead as Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) appears to be carving out a higher low in December. Nevertheless, as household sentiment in the world’s largest economy is expected to increase for the fourth consecutive month, the development may help to prop up trader sentiment, and we may see a rise in risk-taking behavior as the recovery in the U.S. gathers pace.

--- 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

13:55

9:55

U. of Michigan Confidence (DEC P)

65.8

64.1

Currency

GMT

Release

Expected

Actual

Comments

NZD

20:45

Card Spending (MoM) (NOV)

-0.7%

-0.5%

Declines for the fourth time this year.

NZD

20:45

Card Spending - Retail (MoM) (NOV)

-1.0%

-0.2%

JPY

22:50

BSI Large All Industry (QoQ) (4Q)

--

-2.5

The third negative reading in 2011.

JPY

22:50

BSI Large Manufacturing (QoQ) (4Q)

--

-6.1

JPY

22:50

Gross Domestic Product (QoQ) (3Q F)

1.2%

1.2%

Expands for the first time since 4Q 2010.

JPY

22:50

Gross Domestic Product Annualized (3Q F)

5.2%

5.6%

JPY

22:50

Gross Domestic Product Deflator (YoY) (3Q F)

-1.9%

-2.2%

JPY

22:50

Nominal GDP (QoQ) (3Q F)

1.2%

1.2%

JPY

22:50

Japan Money Stock M2+CD (YoY) (NOV)

2.7%

3.0%

Fastest pace of growth since July.

JPY

22:50

Japan Money Stock M3 (YoY) (NOV)

2.3%

2.5%

NZD

23:00

ANZ Consumer Confidence Index (DEC)

--

108.4

Weakens for the fourth month.

NZD

23:00

ANZ Consumer Confidence (MoM) (DEC)

--

-0.6%

CNY

1:00

Consumer Price Index (YoY) (NOV)

4.5%

4.2%

Slowest pace of growth since September 2010.

CNY

1:00

Producer Price Index (YoY) (NOV)

3.3%

2.7%

Lowest since December 2009.

EUR

6:00

German Labor Costs s.a. (QoQ) (3Q)

--

-0.9%

Falls for the first time since 3Q 2010.

EUR

6:00

German Labor Costs w.d.a. (YoY) (3Q)

--

2.9%

EUR

6:00

German Trade Balance (euros) (OCT)

15.0B

11.6B

Smallest Surplus since July.

EUR

6:00

German Current Account (euros) (OCT)

14.0B

10.3B

EUR

6:00

German Exports s.a. (MoM) (OCT)

-1.3%

-3.6%

EUR

6:00

German Imports s.a. (MoM) (OCT)

0.3%

-1.0%

EUR

6:00

German CPI (MoM) (NOV F)

0.0%

0.0%

Slowest pace of growth since August.

EUR

6:00

German CPI (YoY) (NOV F)

2.4%

2.4%

EUR

6:00

German CPI - EU Harmonised (MoM) (NOV F)

0.0%

0.0%

EUR

6:00

German CPI - EU Harmonised (YoY) (NOV F)

2.8%

2.8%

EUR

6:45

French Industrial Production (MoM) (OCT)

-0.2%

0.0%

Fails to grow for the second consecutive month.

EUR

6:45

French Industrial Production (YoY) (OCT)

2.8%

1.8%

EUR

6:45

French Manufacturing Production (MoM) (OCT)

-0.2%

0.0%

EUR

6:45

French Manufacturing Production (YoY) (OCT)

3.5%

2.6%

EUR

6:45

French Central Government Balance (euros) (OCT)

--

-99.4B

Largest shortfall since August.

GBP

8:30

PPI Input n.s.a. (MoM) (NOV)

-0.1%

0.1%

Slowest pace of growth since December 2010.

GBP

8:30

PPI Input n.s.a. (YoY) (NOV)

12.9%

13.4%

GBP

8:30

PPI Output n.s.a. (MoM) (NOV)

0.0%

0.2%

Cools to the slowest pace of growth since May.

GBP

8:30

PPI Output n.s.a. (YoY) (NOV)

5.3%

5.4%

GBP

8:30

PPI Output Core n.s.a. (MoM) (NOV)

0.0%

0.0%

GBP

8:30

PPI Core n.s.a. (YoY) (NOV)

3.3%

3.2%

GBP

8:30

Visible Trade Balance (Pounds) (OCT)

-9.400B

-7.557B

Smallest deficit since April.

GBP

8:30

Trade Balance Non EU (Pounds) (OCT)

-5.400B

-4.554B

GBP

8:30

Total Trade Balance (Pounds) (OCT)

-3.450B

-1.552B

CAD

12:30

Labor Productivity (QoQ) (3Q)

-0.2%

0.4%

Increases for the second time this year.

CAD

12:30

International Merchandise Trade (Canadian dollar) (OCT)

0.70B

-0.89B

USD

12:30

Trade Balance (OCT)

-$43.9B

-43.5B

Deficit narrows for the fourth month.

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