Euro halts three-day rally

Talking Points

  • Japanese Yen: Benefits From Risk Aversion
  • Pound: BoE Sees “Substantial Headwinds”
  • Euro: Manufacturing, Services Slows More-Than-Expected
  • U.S. Dollar: Existing Home Sales, Leading Indicator on Tap

Dismal data coming out of the Euro-Zone pushed the single-currency to a low of 1.3311 during the overnight trade, and the exchange rate may continue to push lower throughout the day as investors scale back their appetite for risk. The EUR/USD halted the three-day rally, with the daily relative strength index pulling back from overbought territory, and we may see the exchange rate fall back towards the 200-Day SMA at 1.3208 going into the end of the week to test for short-term support. As the RSI falls from a high of 74, the downturn in the oscillator suggest that a corrective retracement will unfold going into the following week, and a break below the 200-Day moving average is likely to expose the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120-30.

Meanwhile, the economic docket showed manufacturing and service-based activity in the Euro-Zone grew at a slower pace in September, with the composite index falling back to 53.8 from a revised 56.2 in July amid forecasts for a 55.7 print. At the same time, a spokesman for the European Commission talked down fears surrounding Greece and said that there is “no discussion” of providing addition funds to the ailing economy” during a press release in Brussels. The commission went on to say that it expects borrowing rates for Greece to normalize by the end of its three-year program, but the austerity measures taken on by the government is likely to weigh on the recovery as policy makers withdraw fiscal support. As the rebound in economic activity cools, managing the downside risks for the region will certainly become an increasing challenge for the European Central Bank, and the uncertainties surrounding the growth outlook could weigh on the exchange rate over the medium-term as the Governing Council expects to see an “uneven” recovery.

The British Pound held within the previous day’s range, with the exchange rate rising to 1.5305 during the European trade, and the currency may hold steady throughout the day as price action fails to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700. As the GBP/USD carves a near-term top, the exchange rate may work its way back towards the lower bounds of its recent range going into the end of the week, which lies around 1.5300. Nevertheless, Bank of England Chief Economist Spencer Dale said the U.K. faces “substantial headwinds” as the banking sector remains fragile, and went onto say that the economic recovery needs to be sustainable during an interview with the Western Mail. As policy makers hold a cautious outlook for the region, we are likely to see the BoE maintain the expansion in monetary policy throughout the remainder of the year, but the stickiness in price growth could spur interest rate expectations as inflation continues to hold above the government’s 3% limit.

The greenback bounces back against most of its major counterparts, while the USD/JPY fell back from a high of 84.66 ahead of the U.S. trade, and the dollar may continue to gain ground throughout the day as it benefits from safe-haven flows. Nevertheless, the economic docket is expected to show existing home sales in the world’s largest economy increase 7.1% in August following the record-pace of contraction during the previous month, while the leading indicator is projected to tip 0.1% for the second consecutive month in August. As risk sentiment continues to dictate price action in the currency market, the data could stoke a rebound in market sentiment as the outlook for future growth improves.

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