Euro, pound lose ground while dollar rallies

The Euro pared the advance from the previous week and slipped to a low of 1.3257 during the overnight trade, and the near-term rally appears to be tapering off as the daily RSI falls back from overbought territory.

Talking Points

  • Japanese Yen: Mixed Against The Majors For Third Day
  • Pound: Pares Overnight Advance
  • Euro: Investor Confidence Hits Two-Year High
  • U.S. Dollar: Risk Trends Could Weigh on Greenback Strength

Meanwhile, European Central Bank board member Athanasios Orphanides said policy makers may revise its growth forecast next month during an interview with Reuters, which could “show an improvement for the whole year 2010 compared to the previous projections”, but talked down speculation for a rate hike and said that the “policy accommodation should be removed when it poses a threat to our price stability objective” as the central bank expects inflation to remain subdued over the medium-term.

Nevertheless, the economic docket showed the trade surplus to Germany widened to EUR 14.1B in June amid forecasts for a EUR 12.0B print as the expansion in foreign demands outpaced the growth in imports, and the recovery may gather pace over the coming months as the region continues to benefit from the rise in global trade. In addition, investor confidence in the Euro-Zone jumped to a two-year high in August, with the Sentix survey advancing to 8.5 from -1.3 in the previous month, and the data reinforces an enhanced outlook for the region, which could drive the exchange rate higher over the near-term. With growth prospects improving, the Governing Council may see scope to restore its exit strategy over the coming months, but the ECB may look to keep the benchmark interest rate at the record-low of 1.00% throughout the remainder of the year as the tightening in fiscal policy drags on the real economy.

The British Pound retraced the overnight advance and fell to 1.5930 during the European trade, but the GBP/USD may hold steady going into the North American session as it outperforms against the major currencies. However, as the near-term rally fails to drive the pound-dollar above 1.6000, there could be a corrective retracement in the exchange rate as the daily RSI falls back from a high of 77, and we may see the pair fall back towards the 200-Day SMA at 1.5529 to test for support. Nevertheless, market participants appear to be raising the stakes for a rate hike as the Bank of England expects price growth to hold above the 2% target over the medium-term, and policy makers may drop their dovish outlook going forward as consumer prices continue to hover above the government’s 3% limit for inflation.

The greenback rallied across the board, with the USD/JPY advancing to a high of 85.73, and the light economic calendar scheduled for Monday could lead the dollar to hold steady throughout the North American session. However, as equity futures foreshadows a higher open for the U.S. market, a rise in risk appetite could weigh on the greenback as market sentiment continues to drive price action in the currency market, but we may see the dollar hold steady ahead of the Federal Open Market Committee interest rate decision due out on Tuesday as investors weigh the prospects for future policy.

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