Euro, pound Pull Back as Risk Appetite Wanes

Euro, pound Pull Back as Risk Appetite Wanes

The Euro slipped to a low of 1.3182 during the overnight trade following the shift in market sentiment, and the single-currency may continue to lose ground going into the North American session as investors scale back their appetite for risk.

Talking Points

· Japanese Yen: Advances Against Most Counterparts

· Pound: Service-Based Activity Grows At Slower Pace

· Euro: Retail Sales Hold Flat

· U.S. Dollar: ISM-Non-Manufacturing, ADP Employment on Tap

Meanwhile, Portugal sold EUR 660M of government debt due in February with a yield of 1.96%, along with EUR 505M in bonds expiring in July, yielding 2.394%, which compares to the 2.452% offered at its last 12-month bill auction in July.

As financial conditions improve, with the recovery gathers pace, the European Central Bank may raise its economic assessment and see scope to revert back to its exit strategy over the coming months, but the Governing Council is likely to a dovish outlook for future policy as they expect inflation to remain subdued going into 2011. The ECB is widely anticipated to hold the benchmark interest rate at the record-low of 1.00% tomorrow, and the press conference with President Jean-Claude Trichet at 12:30 GMT is likely to spark increased volatility in the exchange rate as investors weigh the prospects for future policy. Nevertheless, the final PMI reading for the Euro-Zone showed service-based activity expanded at a slower pace than initially expected, with the gauge falling back to 55.8 in July from a preliminary forecast of 56.0, while the composite index held steady at 56.7 from 56.0 in June. Meanwhile, retail spending in the euro-region held flat in June after expanding a revised 0.4% in the previous month, which was largely in-line with expectations.

The British Pound halted the nine-day rally and slipped to a low of 1.5891 during the European trade, and the GBP/USD looks poised for a corrective retracements as the daily RSI falls back from a high of 77. However, as price action breaks out of the upward trending channel from the June low (1.4346), the British Pound may continue to retrace the decline from earlier this year as the exchange rate continues to mark higher highs paired with higher lows, but we may see the pair test the 200-Day SMA (1.5537) for support before pushing back to the upside. Nevertheless, the Halifax home price index increased 0.6% in July amid forecasts for a 0.3% decline, with the BRC’s gauge for shop prices rising 1.5% for the second-consecutive month during the same period, while service-based activity unexpectedly grew at a slower pace in July as the PMI reading fell back to 53.1 from 54.4 in the previous month. As the outlook for future growth remains clouded with uncertainties, the Bank of England is expected to maintain its current policy thing month, but the stickiness in prices growth could lead the MPC to start normalizing monetary policy over the coming months as it maintains its dual mandate to ensure price stability while fostering full-employment.

U.S. dollar price action was mixed throughout the overnight trade, with the USD/JPY extending the previous day’s decline to reach a fresh yearly low of 85.32, but the drop in market sentiment could spark a rise in safe-haven flows, which would present a clear directional bias for the greenback. Meanwhile, the ADP employment report is expected to show a 35K expansion in private payrolls following the 13K in the previous month, and the data should bode well for Friday’s non-farm payroll report as market participants expect the U.S. labor market to weaken further in June. At the same time, the ISM non-manufacturing index is forecasted to fall back to 53.0 in July from 53.8 in the previous month, and the slower pace of growth in service-based activity could lead the Fed to maintain a cautious outlook for the economy as households continue to face tightening credit conditions paired with the deterioration in the labor market.

David Song is a contributor to DailyFX, which provides forex news on the economic reports and political events of the day. See more at

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