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FOREX: Euro Optimism Fizzles, Sterling To Consolidate Further

FOREX: Euro Optimism Fizzles, Sterling To Consolidate Further

2012-01-09 14:40:00
David Song, Strategist
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Talking Points

  • Euro: EU To Pass Fiscal Pact In First-Quarter, ESM Pulled Up To July
  • British Pound: Benefits From Risk Appetite, Consolidation Ahead
  • U.S. Dollar: Weighed By Risk Appetite, Consumer Credit On Tap

Euro: EU To Pass Fiscal Pact In First-Quarter, ESM Pulled Up To July

The Euro advanced to an overnight high of 1.2784 on hopes that German Chancellor Angela Merkel and French President Nicolas Sarkozy will take additional steps to stem the risk for contagion, but the developments coming out of the highly anticipated meeting appear to be weighing on market sentiment as the two make an attempt to buy more time. Indeed, Chancellor Merkel announced that the new fiscal pact drawn up by the EU could be passed by March, while President Sarkozy floated the idea of launching the European Stability Mechanism in July as the ongoing turmoil in the financial system continues to bear down on the real economy.

At the same time, Merkel argued that the European Central Bank could lend a helping hand to bolster the expertise of the European Financial Stability Facility, but we may see the Governing Council continue to move away from its nonstandard measures as its ballooning balance sheet comes under scrutiny. As ECB President Mario Draghi targets the benchmark interest rate, market participants see a risk of a zero interest rate policy in the euro-area, and expectations for additional monetary support continues to cast a bearish outlook for the single currency as the fundamental outlook for the region turns increasingly dim. Nevertheless, the short-term rebound in the EUR/USD may gather pace this week as the relative strength index climbs back from oversold territory, but we expect to see a lower high in the exchange rate as the downward trend in the euro-dollar gathers pace.

British Pound: Benefits From Risk Appetite, Consolidation Ahead

The British Pound advanced to a high of 1.5463 following the shift in market sentiment, and the sterling should continue to retrace the sharp decline from the previous week as investors increase their appetite for risk. However, as market participants look towards the Bank of England interest rate decision on Thursday, we may see the GBP/USD consolidate during the first-half of the week, but investors may show a muted reaction to the announcement should the central bank refrain from releasing a policy statement. In turn, we may have to wait for the BoE minutes due out on January 25 to get a better gauge for monetary policy, but the central bank may ultimately talk up speculation for additional monetary support as the U.K. faces a growing risk of a double-dip recession. As the GBP/USD trades within the narrow range from the end of December, we should see the exchange rate move sideways over the near-term, but the sterling may weaken further in 2012 as the fundamental outlook for Britain deteriorates.

U.S. Dollar: Weighed By Risk Appetite, Consumer Credit On Tap

The greenback gave back the sharp advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,983, and the rise in risk appetite should continue to dampen the appeal of the reserve currency as market sentiment continues to dictate price action in the currency market. As the U.S. market opens higher, the rebound in risk-taking behavior may gather pace during the next 24-hours of trading, but we may see the greenback regain its footing later this week as the economic docket is expected to reinforce an improved outlook for the world’s largest economy. In turn, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and easing bets for another large-scale asset purchase program should prop up the reserve currency as market participants see scope for the FOMC to conclude its easing cycle in 2012.

--- 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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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

15:30

10:30

Business Outlook Future Sales (4Q)

10.00

6.00

CAD

15:30

10:30

Bank of Canada Senior Loan Officer Survey (4Q)

--

-26.90

USD

17:40

12:40

Fed's Lockhart to Speak on Economy in Atlanta

--

--

USD

20:00

15:00

Consumer Credit (NOV)

$7.000B

$7.645B

Currency

GMT

Release

Expected

Actual

Comments

CNY

09:11

New Yuan Loans (DEC)

575.0B

640.5B

Fastest rate of loans since April 2011.

CNY

09:11

Money Supply - M0 (YoY) (DEC)

--

13.8%

CNY

09:11

Money Supply - M1 (YoY) (DEC)

7.9%

7.9%

CNY

09:11

Money Supply - M2 (YoY) (DEC)

12.9%

13.6%

NZD

21:45

Trade Balance (New Zealand dollars) (NOV)

-300M

-308M

Trade balance sits in negative territory for the fourth month.

NZD

21:45

Exports (New Zealand dollars) (NOV)

3.90B

3.91B

NZD

21:45

Imports (New Zealand dollars) (NOV)

4.20B

4.2BB

NZD

21:45

Balance (YTD) (New Zealand dollars) (NOV)

539M

555M

AUD

22:30

AiG Performance of Construction Index (DEC)

--

41.0

Highest since February.

AUD

23:40

HIA New Home Sales (MoM) (NOV)

--

6.8%

Fastest pace of growth since January 2010.

AUD

00:30

Retail Sales s.a. (MoM) (NOV)

0.4%

0.0%

Fails to grow for the fourth time this year.

AUD

05:30

Foreign Reserves (A$) (DEC)

--

46.1B

Highest since July 2010.

CHF

06:45

Unemployment Rate (DEC)

3.2%

3.3%

Highest since April.

CHF

06:45

Unemployment Rate s.a. (DEC)

3.1%

3.1%

EUR

07:00

German Trade Balance (euros) (NOV)

12.0B

16.2B

Biggest surplus since September, imports weaken for the fourth time in 2011.

EUR

07:00

German Current Account (euros) (NOV)

11.5B

14.3B

EUR

07:00

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

0.5%

2.5%

EUR

07:00

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

0.5%

-0.4%

EUR

07:45

French Trade Balance (euros) (NOV)

-6000M

-4412M

Smallest deficit since July 2010.

CHF

08:15

Retail Sales (Real) (YoY) (NOV)

0.2%

1.8%

Biggest rise since July.

EUR

09:30

Euro-Zone Sentix Investor Confidence (JAN)

--

-21.1

Holds in negative territory for the sixth month.

EUR

11:00

German Industrial Production s.a. (MoM) (NOV)

-0.5%

-0.6%

Contracts for the fourth time this year.

EUR

11:00

German Industrial Production n.s.a. and w.d.a. (YoY) (NOV)

3.9%

3.6%

CAD

13:30

Building Permits (MoM) (NOV)

-5.0%

-3.6%

Weakens for the sixth time in 2011.

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