Euro halts decline, pound pares selloff

The euro bounced back during the overnight trade, with price action crossing back above the 100-Day SMA at 1.2794, and the exchange rate may hold steady going into the North American trade as the economic docket remains fairly light for Monday.

Talking Points

  • Japanese Yen: Advances Against Most Currencies
  • Pound: Home Prices Fall For Second Month
  • Euro: Consumer Prices Contract in July
  • U.S. Dollar: Empire Manufacturing, NAHB Housing Index on Tap

However, as equity futures foreshadow a lower open for the U.S. market, a shift in market sentiment could lead the EUR/USD to pare the advance and lead the exchange rate to test the 50-Day SMA (1.2668) for near-term support as risk trends continue to dictate price action in the currency market.

Meanwhile, European Central Bank board member Juergen Stark held an improved outlook for the region and supported the tightening in fiscal policy according to an article in the Financial Times, and said that the “adjustments increase the growth potential” for the region as the economic recovery gathers pace. At the same time, Ireland’s central bank Governor Patrick Honohan said he expects to see a “rather slow” recovery in Europe during an interview with Reuters, and went onto say that the European Union “is prepared to use fiscal resources to take care of member countries with fiscal imbalances.” As policy makers withdraw fiscal support from the economy and target the budget deficit, the ECB is likely to maintain a loose policy throughout the remainder of the year, and central bank President Jean-Claude Trichet may hold a dovish outlook going into 2011 as he expects to see an “uneven” recovery going forward. Nevertheless, the economic docket showed consumer prices in the Euro-Zone slipped 0.3% in July amid projections for a 0.4% decline, while the headline reading for inflation increased to an annualized pace of 1.7% from 1.4% in the previous month, which was largely in-line with forecasts.

The British Pound pared the overnight decline as price action continued to hold above the 200-Day SMA at 1.5508, and the exchange rate could maintain the narrow range going into North American trade as the GBP/USD struggles to push back above the 20-Day SMA at 1.5640. With market participants waiting for Bank of England policy meeting minutes due out on Wednesday at 8:30 GMT, the pound-dollar may hold steady throughout the first half of the week as investors weigh the prospects for future policy, but there could be a muted reaction to the central bank’s comments as traders continue to digest the quarter inflation statement released earlier this month. Nevertheless, a report by Rightmove showed home prices in the U.K. slipped 1.7% in August after contracting 0.6% in the previous month, while values bounced back to an annualized pace of 4.3% from 3.7% in the month prior, and the pullback in price growth could lead the BoE to support the economy throughout the remainder of the year as Governor Mervyn King talks down the risks for inflation.

U.S. dollar price action was mixed during the European trade, with the USD/JPY paring last week’s advance to a reach a low of 85.40, but the drop in risk appetite could stoke a rally in the greenback as the reserve-currency continues to benefit from safe-haven flows. However, the economic docket is expected to show the Empire Manufacturing gauge rebound to 8.30 in August from 5.08 in the previous month, while the NAHB housing market index is forecasted to increase to 15 from 14 during the same period, and the data could spur a rise in market sentiment as the outlook for future growth improves.

David Song is a currency analyst at FXCM.

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