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The euro advanced against the U.S. dollar during the overnight session and reached a fresh yearly high of 1.4714 however, the three-day rally looks to be losing steam as the EUR/USD remains overbought.

Talking Points
• Japanese Yen: Loses Ground Against Comm. Bloc
• Pound: Job Losses Hit 14-Year High
• Euro: Annual Rate of Inflation Falls for Third Month in August
• US Dollar: CPI, Industrial Production on Tap

The euro advanced against the U.S. dollar during the overnight session and reached a fresh yearly high of 1.4714 however, the three-day rally looks to be losing steam as the EUR/USD remains overbought. At the same time, the European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said that the euro-region faces risks of regression as the outlook for a sustainable recovery remained uncertain, and said that taking away the stimulus packages too soon after a crash could lead to a double-dip recession as growth prospects remain weak.

Meanwhile, ECB board member Ewald Nowotny anticipates economic activity to stabilize at a low level in 2010 and expects to see a positive growth rate going into the follow year however, the policy maker went onto say that the economic expansion will too low to stop an increase in unemployment. Nevertheless, the economic docket showed consumer prices in the Euro-Zone increased 0.3% in August after falling 0.7% in the previous month, with the annual rate of inflation slipping 0.2% from the previous year to mark the third consecutive decline. Moreover, core prices grew at an annualized pace of 1.3% for the second month amid forecasts for a 1.2% rise, and as a result, the European Central Bank is likely to hold a neutral policy stance going forward as inflation expectations remain firmly anchored. As the single-currency remains overbought against the greenback, with the RSI holding above 71, the EUR/USD may fall back from the eight-month high to test the weekly low (1.4514) for near-term support however, a break below this level could expose the 20-Day moving average at 1.4396.

The British pound halted the two-day decline after finding intraday support ahead of the 20-Day SMA at 1.6415, and the GBP/USD may push higher over the next 24 hours of trading following the rebound in risk appetite. The economic calendar for the U.K. showed jobless claims increased 24.4K to 2.47M in August, which is the highest since 1995, with the claimant count rate tipping higher to 5.0% from 4.9% in the previous month. At the same time, the annual rate of unemployment measured by the International Labour Organization's standards rose to 7.9% during the three month through July from 7.8% in the previous to mark the highest reading since 1996 despite forecasts for a rise to 8.0%, and the data foreshadows a weakening outlook for private sector spending as households face fading demands for employment paired with tightening credit conditions. As the Bank of England continues to see a risk for a slower recovery, market participants speculate the central bank to take additional steps to steer the nation out of the worst recession since the post-war period, and the pull back in the interest rate outlook may continue to weigh on the exchange rate going forward as investors weigh the prospects for future policy.

The U.S. dollar weakened across the board following the rise in risk appetite, and the reserve currency may continue to lose ground going into the North American trade as equity futures foreshadow a higher open for the U.S. market, Nevertheless, economists forecast consumer prices to increase 0.3% in August, with the annual rate of inflation projected to fall 1.7% from the previous year, while core prices are expected to grow 1.4% from the previous year, and the data could stoke increased selling pressures on the greenback as investors speculate the Federal Reserve to ease policy further over the coming months. At the same time, industrial outputs are projected to increase 0.6% in August, while the NAHB housing market index is anticipate to improve for the third consecutive month in September, and the slew of data is likely to spark volatility across the financial markets as market participants weigh the outlook for a sustainable recovery.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com