subject: Euro Extends Decline as EU Holds Cautious Tone, U.S. Dollar Benefits From Flight to Safety [print this page] Euro Extends Decline as EU Holds Cautious Tone, U.S. Dollar Benefits From Flight to Safety
Talking Points
Japanese Yen: Mixed Across the Board
British Pound: U.K. Raises 2010 GDP, Cuts 2011 Growth Forecast
Euro: EU Maintains Growth Projection For 2010, 2011
U.S. Dollar: Dallas Fed Manufacturing on Tap
The U.S. dollar advanced against its major counterparts during the overnight session, and the near-term rally in the greenback may pick up pace going into the North American trade as fears surrounding the European debt crisis continue to weigh on market sentiment. The EUR/USD tumbled to a low of 1.3136 as the European Union held a cautious outlook for the region and expects the austerity measures to bear down on the economic recovery in the following year. Although, the group maintained its growth forecast for the euro-area as it sees GDP expanding 1.7% this year and 1.5% in 2011, but went onto say that the fundamental outlook remains clouded with high uncertainty as the governments operating under the fixed-exchange rate system struggle to manage their public finances.
As a result, EU Economic and Monetary Affairs Commissioner Olli Rehn said Portugal and Italy may have to take additional steps to meet their fiscal targets as their budget-cutting proposals remain "very ambitious,' but said that the risks to the economic outlook are broadly balanced while speaking at a news conference in Brussels. The bearish sentiment underlying the single-currency may intensify going into December as European policy makers struggle to restore investor confidence, and the ongoing turmoil in the financial markets could lead the European Central Bank to keep its exit strategy on hold throughout the coming months as it aims to balance the risks for the region. As the exchange rate falls back towards the 38.2%% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100-20, the euro-dollar may continue to retrace the advance from December, but the pair may consolidate in the days ahead as price action holds above the 200-Day SMA at 1.3130.
The British Pound fell back from a high of 1.5648 as investors scaled back their appetite for risk, and the flight to safety may continue to drag on the exchange rate as risk trends dictate price action in the currency market. As the GBP/USD breaks out of the upward trend from May, the pound-dollar may trend lower in the days ahead as it searches for support, but the pair could consolidate in the days as price action holds above the April highs around 1.5500. Meanwhile, the U.K. Office for Budget Responsibility sees GDP expanding 1.8% this year versus an initial forecast for 1.6% rise in GDP, while the group expects the growth rate to rise 2.1% in 2011 amid earlier projections for a 2.3% expansion next year. As policy makers in the U.K. see a risk for a slower recovery in the following year, the Bank of England may look to maintain the expansion in monetary policy throughout the beginning of 2011, but the stickiness in price growth could spur a growing split within the MPC as the central bank expects inflation to hold above target next year. As we head into December, speculation surrounding the outlook for future policy should play an increased role in driving price action for the GBP/USD, and the pair may trend sideways over the coming weeks as we expect to see another three-way split at the December 9 interest rate decision.
The greenback rallied against most of its currency counterparts, with the USD/JPY advancing to a high of 84.25, and the dollar may appreciate further as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for Monday, we should see risk sentiment continue to dictate price action for the major currencies, but there could be a small reaction to the Dallas Fed Manufacturing Activity index due out at 15:30 GMT as investors weigh the outlook for future growth. The gauge for manufacturing is expected to increase to 4.5 in November from 2.6 in the previous month, which would be the highest reading since April, and the data could spur a shift in market sentiment as the data encourages an improved outlook for the world's largest economy.
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