The British pound pared the overnight advance and weakened against the greenback for the second day as Bank of England Governor Mervyn King maintained a weakened outlook for the economy, and the GBP/USD may continue to retrace the rally from earlier this month as investors speculate the central bank to take additional steps to stem the downside risks for growth and inflation.
[U][B]Talking Points[/B][/U]
[B]• Japanese Yen: Mixed Across the Board
• Pound: CPI Advances, BoE’s King Holds Weakened Outlook
• Euro: ZEW Investor Confidence Survey Fails to Impress
• US Dollar: Retail Sales, PPI on Tap[/B]
The British pound pared the overnight advance and weakened against the greenback for the second day as Bank of England Governor Mervyn King maintained a weakened outlook for the economy, and the GBP/USD may continue to retrace the rally from earlier this month as investors speculate the central bank to take additional steps to stem the downside risks for growth and inflation. At the same time, the economic docket showed consumer prices in the U.K. rose 0.4% in August to top expectations for a 0.3% rise, with the annual rate of price growth increasing 1.6% from the previous year, while the DCLG home price index slipped at an annualized rate of 8.3% despite forecasts for a 9.5% decline.
BoE Governor King held a weakened outlook for the U.K. banking system in front of the House of Commons Treasury Committee and expects the downturn in employment to weigh on economic activity going forward as households face a weakening labor market paired with tightening credit conditions. The central bank head said banks will need to shore up their capital holdings as he expects loan losses to intensify over the coming months, and went onto discuss the possibility of lowering the deposit rate for reserves to curb its holdings of commercial bank assets. At the same time, Mr. King continued to see downside risks for inflation, while he anticipates the economy to emerge from the recession later this year, and stated that the strength and the sustainability of the economic recovery remains highly uncertain as he expects the CPI to be volatile over the next six months. As a result, the Governor said inflation will guide monetary policy going forward, and continued to reiterate that the public deficit needs to come down as the outlook for future growth remains weak.
The euro tipped lower against the greenback following smaller-than-expected rise in the September ZEW investor confidence survey, and the EUR/USD may weaken further going into the U.S. trade as risk appetite falters. Investor sentiment in Germany rose less than expected, with the index rising to 57.7 from 56.1 in August amid expectations for a rise to 60.0, with the gauge of the current situation advancing to -74.0 from -77.2, while the measure for the Euro-Zone tipped higher to 59.6 from 54.9 in the previous month. Moreover, labor costs unexpectedly rose 4.0% in the second quarter after rising 3.6% in the first three months of the year, and the data suggests that the region has emerged from t he recession in the third-quarter as the government takes unprecedented steps to stem the downside risks for growth and inflation.
The greenback advanced across the board as the reserve currency continued to benefit from safe-haven flows, and the greenback may continue to appreciate against its major counterparts as equity futures foreshadow a lower open for the U.S. market. Nevertheless, economists forecast retail spending to increase 1.9% in August as a result of the government’s ‘cash for clunkers’ incentive, while producer prices are expected to rise 0.8% during the same period, and the data is likely to encourage an improved outlook for the world’s largest economy as the government takes extraordinary steps to stem the downside risks for growth and inflation. Moreover, the Empire-state manufacturing index is anticipated to improve for the third consecutive month in September, with business inventories expected to fall 0.9% in July, while Fed Chairman Ben Bernanke is scheduled to speak on the financial crisis in Washington at 14:00 GMT.
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Forex Weekly Trading Forecast - 09.14.09
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]