Dollar benefits from flight to safety

Talking Points

  • Japanese Yen: Rallies Across The Board
  • British Pound: Holds Narrow Range
  • Euro: Investor Confidence Advances to Three-Year High
  • U.S. Dollar: Fed Officials on Tap

The Euro slipped to a low of 1.3890 on Monday as investors scaled back their appetite for risk, and the single-currency may depreciate throughout the North American trade as risk sentiment continues to dictate price action in the foreign exchange market. With the U.S. dollar regaining its footing, the EUR/USD looks as though it will retrace the advance from October as it appears to have carved out a near-term top ahead of 1.4300. However, as the euro-dollar bounces back from the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900, we may see the pair hold steady throughout the day as the economic docket remains fairly light for the remainder of the day.

Nevertheless, investor confidence in the Euro-Zone rose to a three-year high in November, with the Sentix survey advancing to 14.0 from 8.8 in October to exceeded projections for a 10.0 print, while the trade surplus for Germany widened to EUR 16.8B in September from EUR 9.0B following a 3.0% in exports. At the same time, we saw industrial outputs in Europe’s largest economy unexpectedly contract 0.8% in September to mark the biggest decline in over a year, but it seems as though currency traders are showing little reaction to the mixed batch of data as fears surrounding the European debt crisis resurface. European Union Economic and Monetary Affairs Commissioner Olli Rehn has flown into Ireland today to review the government’s new budget plan, which will increases tax revenues by as nearly EUR 6B over the following year, and the uncertainties surrounding the economic outlook may continue to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As the governments operating under the single-currency tighten fiscal policy to address the budget deficit, there could be increased pressures on the European Central Bank to support the real economy as the rebound in global trade cools, and the Governing Council may uphold the expansion in monetary policy throughout the beginning of 2011 in order to balance the risks for the region.

The British Pound extended the decline from Friday, with the exchange rate slipping to a low of 1.6102 during the overnight trade, but the GBP/USD may continue to push higher over the near-term as it maintains the upward trend from May. As the Bank of England holds the benchmark interest rate at 0.50% and maintains its asset purchase target at GBP 200B, the neutral policy stance endorsed by the central bank could spur a rise in interest rate expectations as the recovery in the U.K. slowly gathers pace, and members of the MPC may see scope to start normalizing monetary policy over the coming months as price growth continues to hold above the government’s 3% limit for inflation. However, as the BoE is scheduled to deliver its quarterly inflation report due out later this week, the GBP/USD may be confined within a narrow rate in the days ahead, but hawkish commentary from the BoE could spark another short-term rally in the exchange rate, which could lead the pound-dollar to retrace the decline from earlier this year.

The greenback advanced against most of its major counterparts, while the USD/JPY slipped to a low of 81.00 as the Japanese Yen rallied across the board, and the rise in risk aversion may dictate price action throughout the day as the economic docket remains fairly light for Monday. We have Fed policy makers scheduled to speak throughout the day, with James Bullard lined up to speak on deflation at 17:30 GMT, who will be followed by Richard Fisher at 18:00 GMT. In addition, the Fed’s Kevin Warsh is scheduled to speak on the economy at 20:30 GMT, and comments from the central bankers could spark a shift in market sentiment as central bank maintains a cautious outlook for future growth. Nevertheless, as equity futures foreshadow a lower open for the U.S. market, the drop in risk appetite may keep the U.S. dollar afloat throughout the day, and the greenback may appreciate further throughout the day as market sentiment continues to dictate price action in the currency market.

CHART 1

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