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Euro At Risk Of Major Selloff, Sterling Strength To Gather Pace

Euro At Risk Of Major Selloff, Sterling Strength To Gather Pace

2012-02-01 14:10:00
David Song, Strategist
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Talking Points

  • Euro: Portugal Sells Three-Month Bills At Lower Yields, ECB Sees Further Weakness
  • British Pound: Hits Fresh Yearly High, Eyes 200-Day SMA
  • U.S. Dollar: Index Maintains Down Trend, ISM Manufacturing On Tap

Euro: Portugal Sells Three-Month Bills At Lower Yields, ECB Sees Further Weakness

The Euro advanced to an overnight high of 1.3202 as Portugal sold EUR 750M in three-month bills yielding 4.068%, which compares to the 4.346% return offered in January, while European policy makers spoke out against a Greek exit as the region struggles to strike a deal with private creditors. As the EUR/USD pares the decline from earlier this week, the rise in risk appetite could spur another run at 1.3250, but the pair may be carving out a lower top this week as the fundamental outlook continues to instill a bearish bias for the single currency.

Indeed, the European Central Bank warned of tightened credit conditions across the region amid the ongoing turmoil in the financial system, and went onto say that ‘euro-area banks expect a further net tightening of credit standards’ as the region slips back into recession. In turn, the outcome of the next three-year loan facility is likely to heavily influence the near-term outlook for the euro, but it seems as though central bank President Mario Draghi will push the benchmark interest rate below 1.00% in an effort to stem the downside risks for growth and inflation. As the fundamental outlook for the euro-area remains bleak, we will maintain a bearish forecast for the EUR/USD, and we should see the exchange rate fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as it breaks out of the upward trending channel from the previous month.

British Pound: Hits Fresh Yearly High, Eyes 200-Day SMA

The British Pound climbed to a fresh yearly high of 1.5867 amid the rise in risk-taking behavior and the sterling may continue to recoup the losses from the end of 2011 as it maintains the upward trending channel from January. However, the slowing recovery in the U.K. may dampen the bullish sentiment underlining the sterling as market participants expect the Bank of England to expand monetary policy further in 2012. Nevertheless, as the BoE maintains a wait-and-see approach, the recent momentum in the GBP/USD could spur a test of the 200-Day SMA at 1.5964, but we will be closely watching the relative strength index as the oscillator approaches overbought territory.

U.S. Dollar: Index Maintains Down Trend, ISM Manufacturing On Tap

The greenback extended the decline from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a fresh yearly low of 9,699, and the reserve currency may continue to lose ground during the North American trade as the rise in risk-taking behavior dampens the appeal of the reserve currency. However, as manufacturing in the world’s largest economy is expected to expand at a faster pace in January, a rise in the ISM survey could dampen expectations for more monetary easing, and easing bets for another large-scale asset purchase program could prop up the USD as economic recovery gradually gathers pace. In turn, we may see the greenback regain its footing later today, but the index continues to point to further declines for the dollar as it trades within the downward trending channel carried over from the previous year.

--- 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 Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Construction Spending (MoM) (DEC)

0.5%

1.2%

USD

15:00

10:00

ISM Manufacturing (JAN)

54.5

53.9

USD

15:00

10:00

ISM Prices Paid (JAN)

49.5

47.5

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (JAN 27)

3558K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (JAN 27)

-390K

USD

15:30

10:30

DOE U.S. Distillate Inventory (JAN 27)

-2456K

EUR

16:20

11:20

ECB's Jens Weidmann Speaks on Euro Economy

EUR

17:00

12:00

Italian New Car Registrations (YoY) (JAN)

-15.3%

EUR

18:00

13:00

Italian Budget Balance (euros) (YTD) (JAN)

-61.5B

EUR

18:00

13:00

Italian Budget Balance (euros) (JAN)

8.0B

USD

22:00

17:00

Domestic Vehicle Sales (JAN)

10.50M

10.45M

USD

22:00

17:00

Total Vehicle Sales (JAN)

13.60M

13.52M

Currency

GMT

Release

Expected

Actual

Comments

AUD

0:00

HIA New Home Sales (MoM) (DEC)

--

-4.9%

Declines for the fifth time in 2011.

AUD

0:30

House Price Index (QoQ) (4Q)

-0.6%

-1.0%

Declines for the fourth consecutive quarter.

AUD

0:30

House Price Index (YoY) (4Q)

-3.3%

-4.8%

CNY

1:00

Purchasing Manager Index Manufacturing (JAN)

49.6

50.5

Expands for the second month.

JPY

1:30

Labor Cash Earnings (YoY) (DEC)

-0.3%

-0.2%

Fails to grow for the seventh month.

CNY

2:30

HSBC Purchasing Manager Index Manufacturing (JAN)

--

48.8

Contracts for three straight months.

JPY

5:00

Vehicle Sales (YoY) (JAN)

--

40.7%

Biggest advance since August 2010.

AUD

5:30

RBA Commodity Price Index (JAN)

--

100.2

Slowest pace of growth since March 2010.

AUD

5:30

RBA Commodity Index SDR (YoY) (JAN)

--

6.0%

GBP

7:00

Nationwide House Prices s.a. (MoM) (JAN)

-0.2%

-0.2%

Falls for the second month.

GBP

7:00

Nationwide House Prices n.s.a. (YoY) (JAN)

1.2%

0.6%

CHF

8:15

Retail Sales (Real) (YoY) (DEC)

--

0.6%

Rises for the third month.

CHF

8:30

SVME-Purchasing Managers Index (JAN)

51.2

47.3

Contracts for the fifth month.

EUR

8:45

Italian PMI Manufacturing (JAN)

45.3

46.8

Outputs in the euro-area contracted for the sixth straight month.

EUR

8:50

French PMI Manufacturing (JAN F)

48.5

48.5

EUR

8:55

German PMI Manufacturing (JAN F)

50.9

51.0

EUR

9:00

Euro-Zone PMI Manufacturing (JAN F)

48.7

48.8

GBP

9:30

Purchasing Manager Index Manufacturing (JAN)

50.0

52.1

Fastest pace of growth since April

EUR

10:00

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

2.7%

2.7%

Slowest pace of growth since August.

USD

12:00

MBA Mortgage Applications (JAN 27)

--

-2.9%

Falls for second week.

USD

13:15

ADP Employment Change (JAN)

185K

170K

Slowest pace of growth since October.

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