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Forex: U.S. Dollar Regains Footing Ahead of Heavy Event Risk, Euro Fails To Test
Written by article default Friday, 05 November 2010 10:06
Talking Points* Japanese Yen: Benefits From Rise in Risk Aversion
* British Pound: Price Pressures Ease Off in October
* Euro: Retail Sales Contract For Second Month
* U.S. Dollar: Non-Farm Payrolls, Pending Home Sales on Tap
The Euro slipped to a low of 1.4082 during the overnight trade as the economic docket reinforced a weakened outlook for Europe, and the batch of heavy event risk scheduled for the North American session is likely to spur increased volatility across the major currencies as investors weigh the outlook for future growth. As the recent rally in the EUR/USD stalls ahead of 1.4300, we may see the pair consolidate going into the following week as the daily relative strength index falls back from a high of 67, and the euro-dollar may carve out a near-term top in the days ahead as the greenback appears to be regaining its footing. Nevertheless, the economic docket showed retail spending in the Euro-Zone unexpectedly slipped 0.2% for the second consecutive month in September, while factory orders in Germany tumbled 4.0% to mark the biggest decline since January 2009, and the ongoing slack within the real economy may lead the European Central Bank to maintain a neutral policy stance over the medium-term as it aims to encourage a sustainable recovery.
The Bank of Spain said economic activity probably stalled in the third quarter as the government takes unprecedented steps to manage its public finances, and the tough austerity measures may continue to bear down on the recovery as policy makers withdraw fiscal support. As the recovery cools, there could be increased pressures on the Governing Council to maintain the expansion in monetary policy throughout the first-half of 2011, and the uncertainties clouding the economic outlook may lead the central bank to postpone its exit strategy as policy makers maintain a cautious outlook for the region. Meanwhile, ECB board member Ewald Nowotny held a slightly hawkish tone during an interview with Austria’s APA News and said that the Governing Council remains on track to normalize monetary policy as they expect the recovery to carry into the following year. As the ECB prepares to unwind its extraordinary measures, the fundamental outlook for future policy could drive the EUR/USD higher over the coming months as the Federal Reserve takes additional steps to stimulate the world’s largest economy, and interest rate expectations are likely to play an increased role in driving price action as the Governing Council maintains an enhanced outlook for the region.
The British Pound bounced back from a low of 1.6165 during the European trade, and the underlying strength behind the sterling may push the exchange rate higher going into the end of the week as price action holds above the 23.6% Fibonacci retracement from the 2009 low to high around1.6220-40. As the GBP/USD maintains the upward trend from May, the exchange rate looks poised to retrace the decline from earlier this year, but the rally may consolidate over the following week as the daily RSI approaches overbought territory. Nevertheless, producer prices in the U.K. increased at an annualized pace of 4.0% in October amid forecasts for a 4.4% print, while the core PPI showed a 3.3% rise, which mark the slowest pace of growth since eight months, and easing price pressures could lead the Bank of England to support the economy over the coming months as the private sector remains weak. However, as the MPC refrains from expanding QE and maintains a neutral policy stance, speculation for a rate hike next year could spur additional strength in the GBP/USD as the Fed maintains a highly dovish outlook for monetary policy.
The greenback rallied against most of its major counterparts on Friday, with the USD/JPY advancing to a high of 80.98, and the dollar is likely to face increased volatility going into the North American trade as the economic docket is expected to show U.S. employment expanding for the first time in five-months. Non-farm payrolls are forecasted to increase 60K in October after contracting 95K in the previous month, while the annual rate of unemployment is expected to hold steady at 9.6% for the second consecutive month. At the same time, pending home sales are projected to increase another 3.0% in September after rising 4.3% in the month prior, while consumer credit is expected to contract $3.0B during the same period after falling $3.3B in August. We also have Fed Chairman Ben Bernanke speaking on the economy at 18:00 GMT, while board member Richard Fischer is scheduled to kick off the Atlanta Fed conference at 15:15 GMT, and comments from the central bankers could produce choppy price action in the currency market as investors weigh the outlook for future policy.
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