Euro, British Pound Lose Ground Ahead of U.S.

The Euro pared the overnight rally despite the better-than-expected 2Q GDP report for the region, and the drop in market sentiment may continue to drive the exchange rate lower going into the North American session as equity futures forecast a lower open for the U.S. market.

Talking Points

  • Japanese Yen: Mixed Against The Majors
  • Pound: Maintains Upward Trending Channel From June
  • Euro: 2Q GDP Expands At Faster Pace
  • U.S. Dollar: Retail Sales, U. of Michigan Confidence on Tap

Economic activity in the Euro-Zone expanded 1.0% during the three-months through June, which exceeded expectations for a 0.7% rise, while the annualized rate increased 1.7% to mark the fastest pace of growth since 2008.

Moreover, the growth rate for Germany rose at the fastest since 1991 as GDP climbed 2.2% after expanding a revised 0.5% during the first three-months of the year, and conditions are likely to improve going forward as region continues to benefit from the rebound in global trade. However, a separate report showed the Euro-Zone trade deficit narrowed to a seasonally adjust EUR 1.6B in June from a revised EUR 2.7B in the previous month amid forecast for a EUR 0.7B shortfall, while the headline reading showed a EUR 2.4B surplus, which topped projections for a EUR 1.0B print. However, European Union spokesman Amadeu Altafaj said that the economy remains “fragile,” although the recovery remains on track, and went onto say that the tightening in fiscal policy must be “gradual” and “differentiated” to avoid disturbing the rebound in economic activity. As the governments operating under the fixed-exchange rate system take unprecedented steps to curb the budget deficit and cut public spending, the European Central Bank is likely to support the real economy throughout the second-half of the year, and President Jean-Claude Trichet is likely to hold a dovish outlook for future policy as he expects inflation to remain subdued going forward.

The British Pound fell back from a high of 1.5678 following the drop in risk appetite, but the GBP/USD may maintain the upward trending channel from the June low (1.4346) as price action continues to hold above the 200-Day SMA at 1.5513. However, Cable is likely to face increase volatility over the following week as the Bank of England is scheduled to release its policy meeting minutes on Wednesday at 8:30 GMT, and the central bank is likely to maintain a cautious outlook for the region as it lowers its growth forecast and expects the ongoing slack within the real economy to weigh on price growth going forward. At the same time, MPC board member Andrew Sentance is likely to dissent against the majority and push for a 25bp rate hike for the third month as inflation is expected to hold above the 2% target in 2011, and comments from the central bank should stoke a shift in the exchange rate as investors weigh the prospects for future policy.

U.S. dollar price action was mixed during the European trade, with the USD/JPY falling back to a low of 85.56, and the greenback is likely to face increased volatility going into the North American session as the economic docket is expected to reinforce an improved outlook for future growth. Retail spending in the world’s largest economy is forecasted to increase 0.5% in July following the 0.5% contraction in the month prior, while the headline reading for inflation is projected to bound back to an annualized pace of 1.2% during the same period from 1.1% in June. In addition, household sentiment is anticipated to improve in August as market participants expect the U. of Michigan confidence survey to increase to 69.0 from 67.8 in the previous month, and the slew of data could spark a rebound in risk appetite, which could weigh on the dollar as risk trends continue to drive price action in the currency market.

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