The British Pound pared the previous day’s decline to reach a high of 1.5731 during the European trade, but the lack of momentum to retrace the sell-off from earlier this month may keep the exchange rate within a narrow range throughout the week as investors weigh the outlook for future policy.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Weighed by Risk Appetite
• Pound: CPI Exceeds Upper Bound of 3%
• Euro: Investor Confidence Weakens for Fifth Month
• U.S. Dollar: Empire Manufacturing, TIC Flows on Tap
British Pound Pares Advance as BoE Governor King Maintains Dovish Outlook, Euro Halts Four-Day Decline[/B]
The British Pound pared the previous day’s decline to reach a high of 1.5731 during the European trade, but the lack of momentum to retrace the sell-off from earlier this month may keep the exchange rate within a narrow range throughout the week as investors weigh the outlook for future policy. Meanwhile, the headline reading for inflation exceeded the upper-bound of 3% in January, but Bank of England Governor Mervyn King held a dovish outlook in his letter to Chancellor of the Exchequer Alistair Darling and said that underlying price pressures remain “to the downside.”
Moreover, the central bank head reiterated that the acceleration in price growth is merely a “temporary deviation” and expects inflation to reach the 2% in the second-half of the year as he continues to see a “substantial margin” of slack within the real economy. At the same time, Mr. King stated that he would be willing to tighten monetary policy if CPI growth continues to intensify over the medium-term, while Mr. Darling shared the similar view with the BoE and expects economic activity to pick up going into 2011. Nevertheless, consumer prices in Great Britain rose at an annualized pace of 3.5% in January to mark the fastest pace of growth since November 2008, while price pressures slipped 0.2% during the month amid forecasts for a 0.1% decline. Furthermore, the core rate for inflation increased to 3.1% from 2.8% in December, which fell short of expectations for a rise to 3.2%, and the data is largely in-line with the central bank’s projections as it expects a high level of CPI volatility following the recession. Meanwhile, home prices in the U.K. increased for the second consecutive month in December, with the DCLG index increasing 2.9% from the previous year to top expectations for a 1.2% rise, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.
The Euro halted the four-day decline against the greenback and advanced to a high of 1.3685 during the overnight trade, and we may see the single-currency maintain the downward trending channel from the January high (1.4581) as it fails to retrace the decline from the previous week. Meanwhile, investor confidence in Germany weakened for the fifth consecutive month in February, with the ZEW survey falling back to 45.1 from 47.2 in the previous month, but the gauge for the current situation increased to -54.8 from -56.6 in January. At the same time, the ZEW survey for the Euro-Zone weakened to 40.2 from 46.4 during the same period, which well exceeded expectations for a decline to 41.5, and we may see the European Central Bank maintain a cautious outlook for the region as the EU aims to bailout Greece.
The greenback weakened across the board, with the USD/JPY slipping to a low of 89.71, and the reserve-currency is likely to face increased volatility going into the North American session as traders come back on-line following the holiday in the U.S. and Canada. Meanwhile, the economic docket is expected to reinforce an improved outlook for future growth as market participants forecast the Empire-state manufacturing index to increase to 18.00 in February from 15.92 in the previous month, while the gauge for net long-term TIC flows is forecasted to increase $35.4B in December after rising $126.8B in the month prior. At the same time, Fed board member Thomas Hoenig, who dissented against the FOMC comments to keep borrowing costs at the record-low of an “extended” period of time, is scheduled to speak about the U.S. budget at 17:00 GMT, while the NAHB housing market index is expected to increase to 16 from 15 in January.
[B]Will the EUR/USD Maintain the Downward Trending Channel From January? Join us in the Forum
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Forex Weekly Trading Forecast – 02.15.10[/B]
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]
