Euro searching for support

Talking Points

  • Japanese Yen: Benefits From Risk Aversion
  • British Pound: Mortgage Lending Weakens
  • Euro: Manufacturing, Services Expand At Faster Pace
  • U.S. Dollar: Preliminary 3Q GDP, Existing Home Sales on Tap

Concerns surrounding European debt crisis continued to weigh on the single-currency, with the EUR/USD slipping to a low of 1.3492 during the overnight trade, and the exchange rate may continue to push lower going into the North American session as market sentiment falters. Indeed, European policy makers made another attempt to talk down the risks for contagion, with European Central Bank board member Governor Miguel Angel Fernandez Ordonez, who also heads the Bank of Spain, stating that the region’s banking sector remains “strong”, but market participants are certainly showing little reaction to the claims as they continue to scale back their appetite for risk. At the same time, Mr. Ordonez said that the bailout package for Ireland “has nothing to do with” the central bank’s exit strategy, and encouraged the governments operating the fixed-exchange rate system to carry out their austerity measures as the Governing Council prepares to normalize monetary policy in the following year.

The economic docket for the Euro-Zone showed manufacturing and service-based activity unexpectedly expanded at a faster pace in November, with the composite index advancing to 55.4 from 53.6 in the previous month to mark the highest reading since August, while the final GDP reading for Germany showed economic activity expanded 0.7% in the third-quarter, which was largely in-line with forecasts. As the data reinforces an improved outlook for the region, the ECB may look to gradually withdraw its emergency measures going into 2011, but the dovish outlook held by the majority of the Governing Council could lead the central bank to support the real economy throughout the beginning of the following year as policy makers expect the austerity measures to bear down on the recovery. As the EUR/USD falls back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3490-1.3500, we may see the pair find near-term support around the lower bounds of its recent range later today, but the rise in risk aversion could trigger increased selling pressures on the single-currency and lead the exchange rate to test of the August high at 1.3333.

The British Pound bounced back from a low of 1.5892 during the European trade, and the GBP/USD may continue to retrace the overnight decline as it maintains the upward trend from May. As the pound-dollar continues to find support around the 50-Day SMA at 1.5882, we could see a short reversal emerge later this week, which should lead the pair to retrace the decline from the previous week and lead the exchange rate to work its way back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.6220-40. However, as U.K. policy makers remain committed to aiding Ireland, the Bank of England may look to hold a neutral policy throughout the beginning of 2011, but there could be a growing split within the MPC as the economic outlook remains clouded with uncertainties. A report by the British Bankers’ Association showed loans for home purchases slipped to 30,766 in October from a revised 31,058 in the month prior, and the ongoing weakness in the real economy could renew speculation for further easing as the new coalition in the U.K. withdraws fiscal support and targets the budget deficit.

The greenback rallied against most of its major counterparts on Tuesday, with the USD/JPY advancing to a high of 83.83, and the dollar may continue to gain ground throughout the day as it benefits from the flight to safety. However, the reserve currency is likely to face increased volatility later today as the economic docket is expected to show an upward revision to the 3Q GDP reading, while existing home sales in the U.S. are forecasted to contract 1.1% in October to an annualize pace of 4.48M from 4.53M in the previous month. In addition, the Federal Reserve is scheduled to release its policy meeting minutes at 19:00 GMT and we are likely to hear the central bank maintain a cautious outlook for the world’s largest economy given the substantial amount of slack within the private sector.

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