Euro Halts Four-Day Advance, British Pound Weakens for Second Day

DailyFx · September 18, 2009, 7:00am

The EUR/USD halted the four-day rally and fell back from the yearly high (1.4770) on the back of U.S. dollar strength, and the pair may continue to retrace the advance from earlier this week as market participants curb their appetite for higher yielding currencies.

[U][B]Talking Points[/B][/U][B]
• Japanese Yen: USD/JPY Fails to Break 10-Day SMA
• Pound: Public Sector Borrowing Jumps in August
• Euro: Current Account Expands
• US Dollar: Risk Trends to Lead the Way[/B]

The EUR/USD halted the four-day rally and fell back from the yearly high (1.4770) on the back of U.S. dollar strength, and the pair may continue to retrace the advance from earlier this week as market participants curb their appetite for higher yielding currencies. The euro-dollar tipped lower during the overnight session to reach a low of 1.4646 as the pair remains overbought however; the pair has pushed back above 1.4700 during the last hour of trade and may continue to retrace the overnight decline going into the U.S. trade as European equities turn higher.

Meanwhile, producer prices in Germany increased 0.5% in August amid expectations for a 0.2% rise, with the annual rate of inflation falling 6.9% from the previous year. The breakdown of the report showed energy prices jumped 1.1% during the month, with the cost of heating oil advancing 11.2%, while prices for basic goods rose 0.5% from July. At the same time, the Euro-Zone current account surged EUR 6.6B seasonally adjusted in July after falling 4.3B in June, with the flows of goods and services increasing for the second consecutive month. The data reinforces an improved outlook for the region as policy makers take unprecedented steps to stem the downside risks for growth and inflation, and the European Central Bank is likely to hold a neutral policy stance going forward as price pressures pick up. As the central bank raises its growth outlook and expects economic activity to improve throughout the second-half of the year, long-term expectations for higher interest rates may continue to drive the euro higher over the near-term as market participants speculate the ECB to tighten policy over the next 12 months.

The British pound weakened against the greenback for the second-day and slipped below the 20-Day SMA at 1.6404, but bounced back from the intraday low (1.6295) as the GBP/USD continued find near-term support ahead of the 100-Day moving average at 1.6243, and the pair is likely to hold a broad range over the following week as investors weigh the outlook for future policy. Public sector borrowing in the U.K. jumped GBP 16.1B in August amid forecasts for a GBP 17.6B rise, and is up from GBP 9.9B in the previous year. Government spending jumped GBP 45.6B during the month while inflows slumped 9.1% from the previous year to GBP 34.1B, which raised the public debt to GBP 804.8B, 57.5% of GDP. As policy makers attempt to steer the nation out of the worst recession since the post-war period, the Chancellor of the Exchequer Alistair Darling said that the government must continue to support the economy as the Bank of England sees a risk for a slower recovery, and the government may take additional steps to stem the downside risks for growth and inflation as the economic outlook remains highly uncertain.

The U.S. dollar strengthen across the board after weakening against its currency counterparts throughout the week, and the greenback may hold steady over the next few hours of trade as the economic docket lacks market moving potential. However, as risk trends continue to drive price action in the foreign exchange market, the reserve currency may face increased volatility going into the North American session as U.S. equity futures pare the overnight decline and turn higher ahead of the open, and a rebound in risk appetite is likely to weigh on the reserve currency as investors move into higher-yielding assets.

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