The British pound weakened against the U.S. dollar for the fourth consecutive day, with the exchange rate slipping to a low of 1.5769 following the rise in risk aversion and the GBP/USD may continue to retrace the advance from March as investors curb their appetite for higher yielding assets.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: USD/JPY Slips Below 88.50
• Pound: U.K. Hometrack Survey Rises the Most in Two-Years
• Euro: ECB Maintains Dovish Outlook for Inflation
• US Dollar: Dallas Fed Manufacturing Index on Tap[/B]
The British pound weakened against the U.S. dollar for the fourth consecutive day, with the exchange rate slipping to a low of 1.5769 following the rise in risk aversion and the GBP/USD may continue to retrace the advance from March as investors curb their appetite for higher yielding assets. Meanwhile, Bank of England Chief Economist Spencer Dale held an improved outlook for the region and said that the economy seems to have stabilized, but held a cautious outlook for future growth as he expects demands for employment to “remain low, or fall further’ over the coming months.
At the same time, Mr. Dale noted that “confidence levels have stopped falling,” but went onto say that he continues to see “a sense of quite realistic caution” amongst businesses as the outlook for future growth remains uncertain. As a result, the head economists at the central bank said that “it could take a while” before economic conditions get back to normal, and expects a “relatively slow and gradual” rebound in employment following the slack in domestic production. Nevertheless, the economic docket reinforced an improved outlook for the U.K. housing market as the Hometrack survey improved for the second consecutive month in September, with the index increasing 0.2% from the previous month to mark the biggest rise in the past two-years. As the Bank of England pledges to maintain the benchmark interest rate at the record-low going into the following year and commits GBP 175B in asset purchases to stem the downside risks for growth and inflation, the extraordinary efforts should help to steer the economy out of recession however, fears of a protracted recovery may continue to weigh on the exchange rate as policy makers hold a dovish outlook for future policy.
The euro tipped lower against the greenback but found intraday support ahead of the 20-Day moving average at 1.4560, and the EUR/USD may continue to hold the narrow range from the previous week as investors weigh the outlook for future policy. European Central Bank Governing Council member Ewald Nowotny held a dovish outlook for inflation and expects price growth to “clearly” hold below the 2% target over the next two-years, and went onto say that it is “too early” for the central bank to implement an exit strategy as the economic outlook remains uncertain. As the Governing Council holds a dovish policy stance and remains reluctant to prematurely implement an exit strategy, the ECB is likely to hold the benchmark interest rate at the record-low going into the following year and may look to expand its EUR 60B in covered-bond purchases over the coming months in an effort to support the banking system and stem the downside risks for growth and inflation.
The U.S. dollar appreciated against most of its major counterparts during the overnight trade as the reserve currency continued to benefit from safe-haven flows, and the slump in risk appetite may push the greenback higher going into the North American session as equity futures foreshadow a lower open for the U.S. stock market. Meanwhile, the Chicago Fed National Activity index due out at 12:30 GMT is likely spark volatility in the currency market as investors weigh the outlook for future growth, while the Dallas Fed Manufacturing Activity index due out at 14:30 GMT is likely to instill an enhanced outlook for production as economists forecast the index to fall at a slower pace from the previous month. Nevertheless, the data may fail to move the markets as investors await the final GDP reading due out on Wednesday, along with the Non-Farm Payrolls report schedule for release on Friday.
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Forex Weekly Trading Forecast - 09.28.09
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]