Euro Looks Poised To Push Higher, British Pound Weighed By Growth Concerns

The Euro extended the rebound from the 100-Day SMA (1.2646) to reach a fresh weekly

high of 1.3108 and the single-currency looks poised to test the 200-Day SMA at 1.3244 as it breaks out of the narrow range carried over from the previous month.

Talking Points

Japanese Yen: Modestly Higher Against Most Currencies

Pound: Retail Spending Unexpectedly Contracts

Euro: Extends Weekly Rally

U.S. Dollar: Producer Prices, Net TIC Flows Tap

The near-term rally in the EUR/USD appears to be gathering pace and looks as though it will continue to pare the decline from August, but we cannot rule out a risk for a corrective retracement in the coming days as the daily RSI approaches overbought territory. As a result, if price action fails to break above the 200-Day SMA, the exchange rate may congest within a narrow range in the months ahead as investors weigh the prospects for future policy.

European Central Bank board member Mario Draghi, who is also the chairman of the Financial Stability Board, said the new regulations will be "effectively addressing the issues of too-big-to-fail institutions" according to an article in an Italian newspaper, and went onto say that the larger financial institutions should have a higher capital requirement than agreed by the Basel Committee on Banking Supervision in order to withstand future losses. As policy makers pledge to incorporate stringent rules on the banking sector, the efforts to preserve financial stability could pose a risk to the recovery as banks continue to scale back on lending. As a result, the European Central Bank is likely to maintain the expansion in monetary policy going into 2011, and mounting uncertainties surrounding the economic outlook could weigh on the exchange rate even as the Governing Council talks down the risks for the region.

The British Pound halted the three-day rally and slipped to a low of 1.5537 during the European trade as the economic docket reinforce a weakened outlook for future growth. Retail spending in the U.K. unexpectedly slipped 0.4% in August amid forecasts for a 0.2% rise, while sales including auto fuel fell 0.5% during the same period versus forecasts for a 0.3% rise. The reversal in the exchange rate suggests price action may trend sideways over the near-term as it fails to test the 38.2% Fibonacci retracement from the 2009 low to high at 1.5700, and the pair may fall back towards 1.5300 to test for support. At the same time, a survey by the Bank of England showed consumer inflation expectations rose to its highest level since August 2008 as households anticipate price growth to reach an annual pace of 3.4% next year. The stickiness in prices could lead to an increased split within the MPC, which would produce increased volatility in the exchange rate as investors weigh the prospects for future policy.

The greenback strengthen against most of its major counterparts on Thursday, with the USD/JPY bouncing back from a low of 85.21 during the overnight trade, and the greenback may continue to push higher throughout the day as it benefits from a rise in safe-haven flows. Nevertheless, the economic docket is expected show producer prices in the world's largest economy is forecasted to fall back to an annualized pace of 3.1% in August from 4.2% in the previous month, while demands for U.S. assets are projected to increase $42.0B in July after expanding $44.4B in the previous month. As price growth weakens, the data could lead market participants to scale back expectations for the Fed to normalize monetary policy in the coming months as the central bank maintains a dovish outlook.

Euro Looks Poised To Push Higher, British Pound Weighed By Growth Concerns

By: DailyFX

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