Euro Pulls Back to Halt Four-Day Rally, British Pound Continues to Hold Narrow Range

Published August 24th, 2009 - 02:18 GMT

The Euro failed to push above 1.4400 once again, and pared the overnight advance to slip to a low of 1.4281 on Monday to halt the four-day rally.



Talking Points

·         Japanese Yen: Continues to Lose Ground on Risk Appetite

·         Pound: Little Changed From Last Week

·         Euro: Industrial New Orders Jump in June

·         US Dollar: Chicago Fed National Activity Index on Tap

The Euro failed to push above 1.4400 once again, and pared the overnight advance to slip to a low of 1.4281 on Monday to halt the four-day rally. At the same time, the economic docket reinforce an improved outlook for the region as new industrial orders surged in July to top market expectations however, as European Central Bank President Jean-Claude Trichet sees a ‘very bumpy road ahead,’ fears of a slower recovery may continue to drag on the exchange rate as investors weigh the outlook for future policy.

A report by the European Union’s statistics office showed industrial demands jumped 3.1% in June to mark the biggest rise in 19 months amid expectations for a 1.8% rise, and the data suggests the economic downturn is nearing a bottom as policymakers take unprecedented steps to stem the downside risks for growth and inflation. However, the euro failed to react to the news, and weakened throughout the European trade to hold below 1.4325, Friday’s close. Meanwhile, ECB President Trichet held an improved outlook for the economy at the Federal Reserve summit at Jackson Hole, Wyoming and said that ‘the real economy is starting to get out of the period of freefall,’ and defended the Governing Councils stance on monetary policy by stating that ‘a gradualist approach of this kind may be the most effective antidote to the threat of price stability.’ At the same time, board member Ewald Nowotny forecasts economic activity to remain ‘sluggish’ following the sharp contraction while, Erkki Liikanen expects unemployment to exceed 9.4% in the months ahead, and the caution tone held by the ECB suggests the central bank may take further steps to jump-start the ailing economy as the outlook for future growth remains uncertain.

The British pound pulled back from the intraday high (1.6548) and slipped below the 50-Day moving average to reach a low of 1.6440, and the GBP/USD may continue to hold a narrow range over the near-term as investors weigh the outlook for future policy. Credit Suisse overnight index swaps have fallen after jumping 126.5bp earlier this month, and are up 86bp at the end of August, and the expansion in monetary policy may continue to drag on the exchange rate as investors scale back expectations for a rate hike next year. As a result, we may see the pound-dollar trend sideways throughout the week however, as loans for home purchases are anticipated to rise for the fourth consecutive month in July, expectations for an economic recovery later this year may drive the Sterling higher in September.

The U.S. dollar strengthened against the Japanese yen and the Swiss franc during the overnight session, but continued to lose ground against the commodity currencies as oil prices continued to hold above $74 a barrel, with market participants moving into higher risk/reward investments. As the economic docket for Monday remains fairly light, the rise in risk appetite may continue to drive the reserve currency lower over the next 24 hours of trading as market sentiment improves. Nevertheless, the Chicago Fed National Activity index is likely to reinforce an enhanced outlook for future growth as economic activity improves however, an unexpectedly decline could weigh on the markets and lead the greenback higher as risk trends continue to dictate price action in the currency market.

Will The EUR/USD Remain Above 1.4000? Join us in the Forurm

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

 


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