The euro halted the two-day decline against the U.S. dollar after finding intraday support ahead of the weekly low however, comments from the European Central Bank looks to be weighing on the exchange rate as policy makers expect the region to face headwinds going into the following year.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: USD/JPY Slips Below 90.00
• Pound: 2Q Business Investments Falls Less Than Forecast
• Euro: German Consumer Confidence Hits 16-Month High
• US Dollar: Durable Goods Orders, New Home Sales in Tap[/B]
The euro halted the two-day decline against the U.S. dollar after finding intraday support ahead of the weekly low however, comments from the European Central Bank looks to be weighing on the exchange rate as policy makers expect the region to face headwinds going into the following year. Meanwhile, the economic docket showed consumer confidence in Germany rose to a 16-year high in October as the GfK index advanced to 4.3 from a revised reading of 3.8 in the previous month, and the data encourages an improved outlook for the region as the economy emerges from the worst recession since the post-war period. However, as the Bundesbank anticipates economic activity to remain subdued going into the following year and projects unemployment to rise, fears of a protracted recovery may weigh on households as President Axel Weber holds a cautious outlook for Europe’s largest economy.
ECB Board member Yves Mersch said that the central bank will not implement an exit strategy until “functioning of the interbank market has been secured,” and warned that an early exit could lead to a double-dip recession as he sees a risk for lower growth potential in the near future. At the same time, Mr. Mersch expects to see a “moderate recovery” in 2010 as Germany and France emerge from the recession, but went onto say that policy makers cannot rule out the risk of a credit crunch as the financial system remains fragile. Moreover, the council member said international coordination will be needed to implement a successful exit strategy, and pledged to “act when it’s time to do so.” The comments suggests the ECB will maintain its current policy over the near-term in order to encourage a sustainable recovery, and is likely to hold a dovish outlook for inflation as policy makers anticipate economic activity to remain at low levels going into the following year.
The British pound weakened against the greenback for the third day to reach a low of 1.5915, and the pair may continue to trend lower over the following week as BoE Governor Mervyn King supports a lower exchange rate. However, as British pound crosses remain oversold, we may see the attempt to push higher going into the US trade however, as investors continue to scale back long-term expectations for higher interest rates in the UK, the pound-dollar may continue to retrace the advance from the March low over the coming month. Meanwhile, total business investments in the U.K. slipped 10.2% in the second quarter amid an initial forecast for a 10.4% decline, while the annualized rate tumbled 21.8% from the previous year, and businesses may continue to scale back on spending as the outlook for future growth remains highly uncertain.
The greenback weakened against most of its major counterparts during the overnight session, with the USD/JPY slipping to a fresh monthly low of 89.96 however, as the economic docket is expected to reinforce an improved outlook for future growth, we may see the dollar bounce back during the North American trade. Demands for US durable goods are expected to increase 0.4% from July, while new home sales are projected to increase for the fifth consecutive month in August, and the data is likely to spur demands for the reserve currency as growth prospects improve. At the same time, the final U. of Michigan confidence reading is expected to rise to 70.5 from an initial forecast of 70.2, while Fed Chairman Ben Bernanke is scheduled to speak in from of the Congressional Black Caucus at 13:00 GMT, and comments from the central bank head may move the markets as investors weigh the outlook for future policy.
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To discuss this report contact David Song, Currency Analyst: <[email protected]>
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