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Forex Daily News | Forex Articles | Forex Information
Thursday, 18 November 2010 11:35

FOREX: Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

Contributed By: DailyFx

 * Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation
* Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue
* British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?
* Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review
* New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence

Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

Most experienced traders are familiar with the concept that a significant breakout is often followed by a short-term correction whereby the market makes it ultimate decision to catalyze the new-found trend or reverse the move to draw price back into a comfortable trading range. Both the dollar and risk appetite trends are currently in this transition period. Looking for the logic behind this pause during a period that many would think is a clear signal to plow into a new trend, there is both a technical and fundamental motivation. From the technical side of things, former support is often treated as new resistance (and vice versa) as the initial breakout flashes through momentum by clearing nearby entry and stop orders. As this accelerant is burnt off, the many speculators used to the old trend will attempt to jump back in on what they think is a ‘cheap’ price. Yet, as it becomes evident that the market is struggling to overtake that former floor, reality begins to set in and the eager traders capitulate. That said, a false breakout is the scenario where there is enough participation to push beyond the technical boundary and put the market back on its original path. We can see that most market benchmarks are in the process of determining which scenario will prevail. The Dollar Index, is pulling back towards the five-month trend and 50-day moving average that it just recently overtook. Reflecting on a broader theme, the S&P 500 marked a very tentative and modest bounce after posting its biggest drop in months to break a preternaturally consistent, two-month bull trend.

The fundamental aspect of this trading phenomenon is unique to our current situation. There are still very serious reasons to doubt the outlook for economic activity, financial stability and the prospect for returns; but it is difficult for market participants to throw in the towel on the impressive trend of the past few months. Since the beginning of September, considerable leverage was dedicated to taking part of the steady climb ahead of the Fed’s second stimulus program. Eventually, investors in equities, corporate debt and other risky assets will submit to the troublesome forecast; but there is currently a lull that is allowing traders to ignore reality. The most prominent threat, European financial stability, has recently found a temporary period of calm after Ireland refused stimulus at Tuesday’s EU meeting. However, this doesn’t improve the situation in the country’s banking system. In fact, it merely postpones a solution while financing costs across the region continue to balloon and the lines of support start to breakdown. Another building threat to risk appetite trends exists in China’s threats to curb inflation. This may seem a prudent economic policy; but the side effect is curbed speculation in one of the market’s favorite trading destinations.

The US is providing its own contribution to the global risk scheme. Adding credence to the Fed’s decision to add a second round of stimulus this month, the core measure of annualized CPI growth slowed to its weakest pace on record at 0.6 percent. This doesn’t really diminish the dollar any further because the expansionary policy has been largely priced in at this point; but it does remind us that there are lasting economic and market troubles related to deflation or stubborn disinflation. The data that we should pay more attention to is the housing starts data. Construction on new developments plunged 11.1 percent to its second lowest level on record owing largely to multi-home dwellings. Yet, this data should be put into context of the larger US housing sector problems. Not only is construction activity anemic; the wealth in home prices is further curbing confidence, a backlog of reposed properties is threatening to keep this sector from contributing to a recovery and ongoing issues with foreclosures threaten to trigger the financial mess tied up in real estate-based mortgages. US housing may pose a second wave crisis.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDUSD and AUDCHF offer Short-Term Setups in Eerily Quit Markets

Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue

Have conditions improved in Europe? It would seem so with the euro slowly retracing its steps after its significant decline of the past week. However, this tentative recovery is more accurately attributed to a pause in more pervasive financial concerns. Ireland is still the most immediate threat to the future of the shared currency. Finance Minister Lenihan’s decision to snub financial support from the EU at the group’s monthly meeting late Tuesday has not improved the situation. In fact, the uncertainty increases the risk for instability for the broader region. However, as the market awaits the EU, ECB and IMF’s assessment of the country’s ability to stabilize its own banking sector, there is time for reflection.

Yet, the market may not simply wait for policymakers to give them the official assessment of the market’s health. It was reported Wednesday that LCH.Clearnet – one of the largest clearing houses for European fixed income – raised its margin on Irish government debt by 15 percent for the second time in a week. The steps to smother confidence are progressive in this way. In the meantime, Ireland isn’t our only concern. Following up on its threat to withhold its next tranche of support to bailout Greece, Austrian officials said the EU was pushing back its December payment to January. Elsewhere, Portugal struggled in its recent bond auction; and it was rumored that the ECB had to buy Portuguese and Greek bonds.

British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?

Even though risk appetite took a slow turn north, the British pound was still struggling to gain traction. This was particularly surprising given a surprise decline in jobless claims through October; though the noncommittal BoE minutes help offset that fundamental marker. Perhaps speculation of a future stimulus program will carry more weight as we look ahead to public borrowing figures.

Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review

The Canadian dollar has merely been following risk appetite and US dollar-based trends the past few days; but perhaps the currency’s own fundamental backdrop will carry more weight over the coming 24 hours. On the docket for Thursday are the Leading Indicators index and capital flows figures. For actual market influence though, the BoC’s quarterly review will likely carry the most weight for policy and growth forecasts.

New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence

It certainly helps that risk appetite trends were bullish; but the New Zealand dollar found an extra push through its own fundamental docket early Thursday morning. For interest rate hawks, the 1.2 percent reading on the 3Q producer price index output doesn’t necessarily promise future hikes; but it sets up the CPI numbers for the occasion. Also, consumer confidence would show relief in a bounce from a year low.

Published in Forex News
Thursday, 18 November 2010 11:36

USD Graphic Rewind: Easing Concerns Over Ireland Lift Risk Appetite, Pressure Buck

Contributed By: DailyFx

 USD_Graphic_Rewind_Easing_Concerns_Over_Ireland_Lift_Risk_Appetite_Pressure_Buck

The dollar index suffered its first daily loss in the last five sessions on Wednesday as stabilizing equities lifted risk appetite and fears began to ease regarding Ireland’s obstinacy to accepting an aid package. The index started the day brightly enough as concerns regarding Ireland’s ability to manage its financing needs alone put the euro under pressure and lifted the buck. However, risk appetite was given a boost early in the North American session from solid consumer prices data and rising equities putting the greenback under the cosh. The index managed to pare its loss a tad into the NY close as US stocks gave back their gains as financials slipped dragging down the broader sentiment. But the dollar got a further knock late in the day as expectations started to rise that Ireland would in fact accept aid from the EU and IMF, lifting the euro once again. The easing of sovereign debt fears early in Asia helped Chinese and Japanese stocks to consolidate after the previous sessions weakness, keeping the pressure on the buck.

Looking ahead, as we approach the European open the index is under mild pressure, but at present this looks little more than consolidation after solid gains over the past couple days. We will only begin to be concerned about the door being opened to further losses in the index if we breach the 78.00 level, which is still some ways off. We therefore maintain our bullish slant in the index and favour this up-move to continue up above the psychologically important 80.00 level and encounter some resistance around 81.00.

Published in Forex News

Contributed By: DailyFx

 The arrival of EU and IMF teams in Dublin to discuss the possibility for a bailout for Ireland, has undoubtedly helped to prop the Euro a bit, as market sentiment improves on the expectation for a resolution. However, we would suggest that the main reason for the latest rebound in the Euro, and currencies across the board has been more a function of the US economy.

The latest batch of data released on Wednesday has taken on more meaning in light of the Fed’s ultra-accommodative monetary policy, which has resulted in large injections of liquidity into the markets over the past several months. With the Fed already implementing a second round of quantitative easing, there are many who now fear that the central bank will need to be extremely careful going forward as there are serious risks of long-term inflation should this accommodation continue to be so aggressive.

The Fed is well aware of this danger, and as such, has made it very clear in its language that while they are more than comfortable with their quantitative easing approach, at this point, they would like to wait to see how economic data comes out before making additional decisions. Clearly, softer than expected CPI and weaker housing starts do not help the case for a reversal in monetary policy, and given the disappointing batch of data, this has only helped to reinforce the need for current quantitative easing measures.

We have therefore seen a sell-off in the US Dollar since the release of this data, as QE bulls have found comfort in the idea that the Fed is less likely to alter its policy. The US Dollar had benefited in recent days from better economic data and comments out from various Fed officials that had suggested the need to soon rein in current monetary policy. However, data like we saw yesterday threatens the USD recovery, and only helps to justify additional selling in the Greenback.

We are not comfortable with this reaction, and instead remain in the camp that believes the US economy is on a path to recovery and the Fed needs to start thinking about reversing its QE policy and worrying more about longer-term inflationary threats. Nevertheless, we can not ignore the will of the markets, and in light of these latest developments, we would expect to see more USD selling over the coming sessions. We will be on the lookout for opportunities to buy the buck into dips.

Looking ahead, the Swiss trade balance is due at 7:15GMT, followed by Eurozone current account at 9:00GMT. UK public finances and public sector net borrowings are then out at 9:30GMT, along with UK retail sales. Swiss ZEW is then out at 10:00GMT, along with the Eurozone OECD economic outlook. UK CBI trend total orders then caps things off for the European calendar at 11:00GMT. The improved risk appetite has helped to fuel a decent recovery in US equity futures and commodity prices.

Published in Forex News

Contributed By: DailyFx

 Europe Session Key Developments

- Ireland's Hold Out Will Lead to Significant Volatility

- British Officials Said They Would Back Support for Ireland to Prevent Bank Woes from Reaching the U.K. Market

European Equities rose modestly on Wednesday as investors hoped that European Union officials would devise a more definitive plan to cope with the region’s debt crisis though all they got was a pledge of support from Britain’s Finance Minister. Concerns that Ireland will not be able to pay the cost of rescuing its banks – in trouble largely because of the real estate boom collapse – has worsened Europe’s government debt crisis. Markets have pushed up borrowing costs for other troubled nations like Portugal and Spain, threatening to destabilize the common Euro currency. Officials from the International Monetary Fund and the European Central Bank will meet in Dublin on Thursday to further analyze the situation with Ireland’s troubled banking sector.

FTSE100 / 5692.56 / +10.66 / +0.19%

U.K. jobless claims unexpectedly fell in October, suggesting that the labor market is recovering momentum as the prospect of a record budget squeeze looms. U.K. Stocks rose slightly led by Experian PLC, the world’s biggest credit-checking company, which jumped 6.3% to 748 pence after reporting that first-half net income rose to $260 million up from $249 million a year earlier. (its biggest gain since April 2009). GlaxoSmithKline PLC (Glaxo) rose 2.4% to 1,243 pence after winning backing from an advisory panel of the U.S. Food and Drug Administration for the company’s Benlysta lupus drug. ICAP PLC, the world’s biggest interdealer broker, rose 1.3% to 472 pence after reporting that first-half pretax profit rose 2% to $292 million as revenue increased by 9%.

CAC 40 / 3792.35 / +29.88 / +0.79%

French stocks also reported gains after the CAC’s biggest drop in 3 months. Soitec SA surged 6.5% to 8.68 Euros after the supplier to the chip industry reported a smaller first-half net loss than expected citing sustained demand from the semiconductor industry. Zodiac Aerospace SA rose 2.2% to 52.78 Euros as the biggest maker of airplane seats in Europe may be taken over by a hostile bid by Safran SA (Safran’s shares slid 1.4% to 21.53 Euros).

DAX / 6700.07 / +36.83 / +0.55%

German stocks advanced on the general sentiment across Europe as the EU started work on a possible aid package for Ireland. Infinenon, Europe’s 2nd biggest chipmaker, rose 1.4% to 6.31 Euros as RBS raised its recommendation on the stock to “buy” from “hold” continuing Infineon’s gains made yesterday on positive profit reports. MAN SE, Europe’s 3rd largest truckmaker, jumped 2.5% to 88.31 Euros while Lufthansa Airlines rose 2.3% to 15.98 Euros. There is still uncertainty in the market with a risk of sideways trading between 6,650 and 6,750 in the DAX index.

IBEX 35/ 10189.30 / +93.90 / +0.93%

Spain’s IBEX 35 index rose 0.9% to trim losses of 2.5% yesterday. Cie Automotive added 2.1% to 4.19 Euros after the Spanish car-parts maker agreed to sell its Mexican steel wheels business to Brazil’s Iochpe-Maxion SA for $3.2 million. Fersa Energias Renovables SA gained for the first time in 4 days gaining 2.3% to 1.11 Euros after Goldman Sachs changed the stock’s status from “neutral” to “sell.”

S&P/MIB / 20639.08 / +76.01 / +0.37%

Pininfarina SpA surged 22% to 3.51 Euros as the designer of sports cars gauges interest for an acquisition by other firms like Magna International Inc. Tenaris SA rose 4.1% to 16.17 Euros paring yesterday’s 5.4% decline as European basic-resource shares climbed 0.8% today, the 5th best performance among 19 Industry groups in the Stoxx Europe 600 Index.

Published in Forex News

Contributed By: DailyFx

 Euro_Risk_Appetite_Climb_As_Ireland_Intimates_It_Will_Tap_Funds_Offer

The euro spiked higher as Ireland’s central bank Governor said that he expects Ireland to ask for assistance from the EU and IMF. He said that the figure could run into the tens of billions of euros and he acknowledges that banks must hold additional capital. Speculation has been rife that Ireland will ask for aid since early in the Asia session and the confirmation has seen the euro spike to fresh highs as concerns over Ireland’s ability to handle its debt alone are finally put to rest.

In recent days the euro has been under significant pressure with Irish obstinacy to requesting funds said to have made ECB President Trichet “mad” (Irish Times).Irish officials had said that funding is available through 2011 and it is fully capable of handling higher borrowing costs. In an abrupt U-turn a deal now seems to be in the offing, Ireland’s central bank Governor stressed that getting the terms and getting conditions of any assistance right is essential. Adding that if an agreement is reached it will be a loan and not a bailout, noting that he is confident a package will be agreed upon as officials would not have arrived in Dublin if there was no hope for consensus. The government initially wanted a clear distinction between an emergency bank aid and financial help for the State, there is now a reluctant acceptance that the former will have to be drawn by the government on behalf of the institutions.

Published in Forex News

Contributed By: DailyFx

The list keeps getting longer. I am seeing so many opportunities out there; and the greater the number of potentials, the harder it is to remain patient. However, patience is key to ensuring that good trades are taken and good entry levels are found. Simply jumping in now while ignoring the natural ebb and flow of the market can get me stopped out or drawn into bad trades that could ultimately be highly correlated (meaning I lose on an entire theme - which would deliver a far bigger loss than expected). We are one day after a critical break in risk appetite trends (as seen on the S&P 500); and the market seems to be far more quiet and making the effort to slowly correct the move. This is very common after a major breakout. A retest of former support as new resistance and vice versa is one of the foundations of trading. Yet, this time around there is a very heavy fundamental slant. We are simply waiting for many different things to fall apart. There is already more than enough there to force the swell in sentiment these past months to collapse; but it looks like we have too many hold outs that want to remain blissfully ignorant to reality.

For live position, I am still in the reduced and long-term long USDJPY position. Today's modest dollar pullback really doesn't alter the bearing on this setup because it is based heavily in fundamentals which means it will take a while to play out. Besides I'm happy to sit still while it is already well enough in the money. New to the game this morning are short AUDUSD and AUDCHF positions. AUDUSD bounced back up to test a short-term descending trendline from the past few weeks and offered me entry on a reduced short at 0.9825. I'll set the stop up 45 points and the first target at 100 (note the skew as I am comfortable with a little more risk here given my larger technical and fundamental outlook). As for AUDCHF, a very consistent falling trend of highs gives me easy entry on a reduced short from 0.9720 and allow me to put up a 50 point stop and 70 point first target.

The pendign column is still huge. It is very tempting to just jump in on a EURUSD and GBPUSD short; but I am waiting for either trend confirmation breaks or retracement to better levels on both cases. For the former I'd like to see 1.3625 and latter 1.5950. A long USDCHF trade above 1.00 is something that I would take even if I have long dollar exposure elsewhere given its fundamental winds. NZDUSD is very similar to AUDUSD; but I still want to highlight its descending trend channel these past two weeks and ptoential break of 0.7650. AUDCAD is still one of my favorite trade possiblities should it break 0.99 and confirm reversal. Then there is GBPCAD with wedge breakout potential, GBPJPY on a pull back to its channel and EURJPY and EURCHF who are staring down their respective range supports.

Published in Forex Articles
Thursday, 18 November 2010 11:38

GBPUSD: Bearish Breakout Ahead?

Contributed By: DailyFx

GBPUSD is edging lower following a test of resistance marked by the midline of a rising channel established from mid-May, with negative divergence on weekly RSI studies hinting a bearish breakout may be ahead. I will look for confirmation on a close below the channel bottom (now at 1.5788) to enter short.

Published in Forex News

USD Dollar (USD) – The dollar weakened slightly against most of the major currencies as Building Permits came out worse than expected at 0.55M vs. 0.57M that was expected. Housing Starts came out negative at 0.52M vs. 0.59M, as well as the CPI, which was also below expections at 0.0% vs. 0.1%. The Stock Markets in the U.S. closed with the Dow Jones weakening by -0.14% and the NASDAQ increasing by +0.25%. Crude Oil continued to weaken and reached a four week low closing at $80.44 a barrel. Gold (XAU) continued it’s down momentum and fell by -0.1% and closed at $1336.90 an ounce. Today, Unemployment Claims are expected at 442K vs. 435K prior. The Philly Fed Manufacturing Index is expected at 5.1 vs. 1.0 prior. Natural Gas Storage is also to be released and is expected at 11B vs. 19B.

Euro (EUR) – The Euro strengthened slightly against the dollar as economic data from the US favored the Euro.  No firm decision regarding Ireland’s debt seemed to cap the EUR/USD around the 1.3500 levels. The pair is above its moving average on the hourly chart. As long as the pair remains above 1.3525, we may see the beginning of a positive momentum for the pair. Overall, EUR/USD traded with a low of 1.3460 and with a high of 1.3565. Data regarding the Current Account is expected to be released at -2.2B vs. -7.5B, and later on in the day, ECB president Trichet is expected to speak.

EUR/USD – Last: 1.3584

Resistance

1.3545

1.3508

1.3460

Support

1.3590

1.3641

1.3687

British Pound (GBP) – The Pound regained lost ground against the dollar in Forex trading and spiked to around 1.5950 only to be knocked to lower levels. The Claimant Count Change came out much less than expected at -3.7K vs. 6.00K prior and prevented further gains. The pair barely managed to hold above 1.5900 levels and traded within a small range of less than 100 pips. Despite the minor recovery as long as the GBP/USD remain below its 1.5950 trend line, the trend is deemed bearish. Overall, GBP/USD traded with a low of 1.5854 and with a high of 1.5948. Today, Public Sector Net Borrowing is expected at 9.0B vs. 15.6B, retail sales are also expected at 0.5% vs. -0.2% prior, later on in the day MPC Member Posen is expected to speak.

GBP/USD - Last:  1.5908

Resistance

1.5920

1.5950


Support

1.5890

1.5870

1.5838

Japanese Yen (JPY) – The yen weekend against the dollar as economic data from the US came out negative, and  put an end to the pairs  6 day positive rally. Although the pair dipped strongly on the daily chart, the pair’s ability to break levels above 83.00 shows the strength of the rally and buying in the dips may be a preferred strategy. As long as the USD/JPY remains above the 82.70 level, the momentum remains positive for the pair. Overall, USD/JPY traded with a low of 83.03 and with a high of 83.55. No economic data is expected today.

USD/JPY-Last: 83.30

Resistance

83.41

83.55

Support

83.10

82.85

82.70

Canadian dollar (CAD) – The Canadian dollar continued to weaken against the dollar as commodities continue to weaken, specifically crude oil which reached a four week low, making currencies linked to commodities and economic growth seem less attractive. The pair is still strongly above its moving average on the four hour chart and continues to be in a positive trend as long as the USD/CAD remains above the 1.0180 levels. Overall, USD/CAD traded with a low of 1.0181 and with a high of 1.0261. Today, Foreign Securities Purchases is to be released and is expected at 81.6B vs. 11.09 prior. Wholesale sales m/m are expected at 0.1% vs. 1.2%.

USD/CAD - Last: 1.0199

Resistance

1.0234

1.0254

Support

1.0180

1.0129

1.0070

 

Published in Forex Articles

Contributed By: DailyFx

Fundamental Outlook

Retail sales in Great Britain are expected to rise 0.4 percent in October after falling 0.2 percent the month prior. At the same time, sales excluding auto fuel are estimated to rise 0.2 percent during the same period. Indeed, this may be the last push higher heading into the Christmas season. A rise in tomorrow’s figures will be the first increase since July of this year where the National Statistics in London said that sales rose 0.9 percent. I expect non specialized store sales to extend September’s advance, while clothing and footwear sales will likely reverse last month’s decline.

In the upcoming months, retail sales are expected to come back under pressure as higher value added taxes will weigh on household spending. These measures are estimated to begin in January. At the same time the massive spending cuts recently announced by the government will also put downward pressure on retail sales. The fiscal tightening measures proposed by Chancellor George Osborne marks the largest cuts in decades, and will in turn weigh on growth. All in all, a reading exceeding expectations will bode well for the British pound, but the advance may be short lived as sales and overall growth in the region will likely come back under pressure in 2011 amid tough austerity measures by the government in order to battle its high budget debt. However, a disappointing result could push the pound lower and lead to a key reversal in the GBPUSD.

Technical Outlook

GBPUSD Daily Chart

British_Pound_Remains_at_the_Crossroads

Charts Created Using Intellicharts – Prepared by Michael Wright

GBPUSD: The pair has extended its two day decline and is now testing the rising trend line dating back to the middle of May. Failure to break back below this level of support may lead the pair back towards the 1.59 area. However, yesterday’s drop below the key 1.60 level is of great concern as the dollar index has worked its way into a tight ascending channel on the daily chart. Unless the greenback buckles, I do not rule out a reversal in the GBPUSD in the near term.

Published in Forex News

Contributed By: DailyFx

 Talking Points

* Japanese Yen: Weakens Across the Board
* British Pound: Jobless Claims Fall For First Time Since July
* Euro: Holds Relative Flat on Fears Surrounding Debt Crisis
* U.S. Dollar: Consumer Prices, Housing Starts on Tap

The British Pound rallied to a high of 1.5936 on Wednesday as the economic docket reinforced an improved outlook for the U.K., but fears surrounding the European debt crisis may continue to bear down on the exchange rate as the risks for contagion intensifies. A report by the U.K. Office for National Statistics showed claims for unemployment benefits unexpectedly slipped 3.7K in October to mark the first decline July, while average weekly earnings including bonuses increased 2.0% during the three-months through September, which was largely in-line with expectations. As the GBP/USD pares the overnight advance ahead of the North American trade, we should see the pair find near-term support around the 50-Day SMA at 1.5838 as it maintains the upward trend from May, but a shift in market sentiment could lead the pound-dollar to weaken further throughout the week as European policy makers struggle to restore investor confidence.

Nevertheless, the Bank of England policy meeting minutes showed the MPC voted 7-1-1 to maintain its current policy in November, with board member Andrew Sentance pushing for a 25bp rate hike, while Adam Posen pressed the central bank to expand quantitative easing by another GBP 250B given the ongoing slack within the real economy. The BoE reiterated that it remains “ready to adjust policy in either direction” as the fundamental outlook remains clouded with uncertainties, and saw a greater risk for inflation as policy makers expect price growth to hold above target throughout 2011. As a result, Mr. Sentance argued that the recent developments strengthens the case to start normalizing monetary as the recovery gradually gathers pace, while Mr. Posen saw increased downside risk for growth as the new coalition in the U.K. tightens fiscal policy in order to balance the budget deficit. As the majority of the BoE maintains a wait-and-see approach, the central bank is likely to keep the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B throughout the remainder of the year, but there could be a growing split within the MPC as inflation continues to hold above the government’s 3% limit for inflation. According, we are likely to see interest rate expectations play a greater role in driving future price action for the GBP/USD, and the central bank may look to adjust monetary policy in the beginning of the following year as the

Policy makers in Europe tried to talk down the fears surrounding the European debt crisis as the governments operating under the fixed-exchange rate system struggle to address the root of its problems, but the euro showed little reaction to the efforts as it held a narrow range throughout the overnight trade. As a result, we are likely to see the single-currency hold steady throughout the day, but increased fears of contagion could drag on the exchange rate throughout the day and lead the EUR/USD to fall back towards the August high at 1.3333. Meanwhile, European Central Bank board member Guy Quaden said policy makers should “avoid restrictive monetary policies and ban protectionist attitudes” as the global recovery remains “fragile,” and continued to see a risk for an “uneven” recovery during an interview with a Belgian newspaper. As the European financial system remains weak, with the debt crisis intensifying, we are likely to see the Governing Council support the economy throughout the remainder of the year, but speculation surrounding the outlook for monetary policy is likely to have a greater impact in driving price action for the euro as the central bank plans to withdraw its emergency measures in 2011.

U.S. dollar price action was mixed overnight, with the USD/JPY extending the rally from the previous day to reach a high of 83.54, and the greenback could face increased volatility going into the North American trade as the economic docket is expected to reinforce a mixed outlook for the U.S. Consumer prices in the world’s largest economy is forecasted to expand at an annual pace of 1.3% in October after expanding 1.1% in the previous month, while housing starts are projected to contract 2.0% during the same period after rising 0.3% in September. At the same time, building permits are expected to jump 3.9% in October following the 5.6% contraction in the previous month, and the batch of mixed data could produce choppy price action in the dollar as investors weigh the outlook for growth and inflation.

Published in Forex News
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