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Forex: Euro At Risk Amid Deepening Recession- Pound Carves Higher Low

Forex: Euro At Risk Amid Deepening Recession- Pound Carves Higher Low

2013-01-08 13:50:00
David Song, Strategist
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Talking Points

  • Euro: Unemployment Hits Record-High, Retail Spending Disappoints
  • British Pound: ‘Modest’ Recovery Ahead, 50-Day SMA in Focus
  • U.S. Dollar: Benefits From Risk Aversion, Consumer Credit On Tap

Euro: Unemployment Hits Record-High, Retail Spending Disappoints

The Euro is giving back the advance from earlier this week, with the EURUSD slipping back below the 1.3100 figure, and the single currency may weaken further in the days ahead as the fundamental outlook for the region turns increasingly bleak.

Indeed, euro-area unemployment climbed to a fresh record-high of 11.8% in November, while retail spending ticked 0.1% higher during the same period amid forecasts for a 0.3% print. The ongoing deterioration in the labor market along with the slowdown in private consumption certainly dampens the outlook for growth and inflation, and fears of a prolonged economic downturn may prompt the European Central Bank (ECB) to adopt a more dovish tone for monetary policy as the deepening recession threatens price stability.

Although the ECB is widely expected to keep the benchmark interest rate at 0.75% in January, central bank President Mario Draghi may show a greater willingness to provide additional monetary stimulus, and the Governing Council may continue to curb its fundamental assessment for the region as inflation is expected to fall below the 2% target in 2013.

As the relative strength index on the EURUSD maintains the downward trend from back in September, we may see the pair continue to threaten the upward trend channel from the July low (1.2041), and the short-term pullback in the euro-dollar may turn into a larger reversal as the ECB continues to carry out its easing cycle.

British Pound: ‘Modest’ Recovery Ahead, 50-Day SMA in Focus

The British Pound pared the advance from the previous day as the GBPUSD weakened to 1.6060, but the sterling may regain its footing later this week as the Bank of England (BoE) drops its dovish tone for monetary policy.

The British Chambers of Commerce now anticipates a ‘modest’ recovery for the U.K. emerges from the double-dip recession, and the pickup in economic activity should keep the BoE on the sidelines as inflation is expected to hold above target over the policy horizon.

In turn, we should see the Monetary Policy Committee keep the benchmark interest rate a 0.50% while maintaining its asset purchase target at GBP 375B, and we may see central bank start to discuss a tentative exit strategy over the coming months in an effort to stem the risk for inflation.

As the GBPUSD holds above the 50-Day SMA (1.6058), a third consecutive close above the moving average could foreshadow a lower high in the exchange rate, and we will maintain a bullish forecast for the British Pound as the BoE slowly moves away from its easing cycle.

U.S. Dollar: Benefits From Risk Aversion, Consumer Credit On Tap

The greenback retraced the decline from the beginning of the week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,093, and the reserve currency may appreciate further during the North American trade as risk sentiment falters.

Nevertheless, the economic docket for the U.S. is expected to show a rebound in the gauge for economic optimism, while consumer credit is projected to increase another $12.750B in November, and a slew of positive developments may increase the appeal of the reserve currency as a growing number of Fed officials strike an improved outlook for the world’s largest economy. As the USDOLLAR maintains the upward trend from back in September, the short-term correction in the index may provide a buying opportunity, and the dollar looks poised to retrace the decline from the 2012 high (10,323) as the Fed talks down expectations for more QE.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

IBD/TIPP Economic Optimism (JAN)

46.50

45.10

USD

20:00

15:00

Consumer Credit (NOV)

$12.750B

$14.158B

NZD

21:45

16:45

Building Permits (MoM) (NOV)

1.70%

-1.50%

AUD

00:00

19:00

HIA New Home Sales (MoM) (NOV)

3.40%

GBP

00:01

19:01

BRC Shop Price Index (YoY) (DEC)

0.30%

1.50%

AUD

00:30

19:30

Job Vacancies (NOV)

4.20%

AUD

00:30

19:30

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

0.30%

0.00%

--- 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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