Talking Points

  • Japanese Yen: Benefits From Risk Aversion
  • British Pound: U.K. GDP Contracts In 4Q
  • Euro: Spain To Inject EUR 20B Into Banking System
  • U.S. Dollar: Consumer Confidence on Tap

The British Pound tumbled lower as economic activity in the U.K. contracted for the first time since the third-quarter of 2009, and the sterling may continue to selloff throughout the North American trade as the region faces a risk for a double-dip recession. The GBP/USD slipped to 1.5750 as the growth rate in Britain unexpectedly weakened 0.5% during the fourth-quarter, and the exchange rate may continue to retrace the advance from earlier this month as the downturn in growth bears down on interest rate expectations. However, the DailyFX Speculative Sentiment Index has certainly turned around following the release, with retail traders now net long against the GBP/USD, but those trying to fade the sharp decline could end up on the wrong side of the market as we expect the Bank of England to talk down speculation for a rate hike later this year.

With the BoE scheduled to release its policy meeting minutes tomorrow at 9:30 GMT, the British Pound could face additional headwinds over the next 24 hours of trading as the recent developments reinforce a weakened outlook for growth and inflation. We expect to see another 7-1-1 vote count as board member Adam Posen sees a risk to undershoot the inflation target, while Andrew Sentence pushes to gradually normalize monetary policy, and there could be a growing split within the MPC as the economic outlook remains clouded with high uncertainty. In turn, dovish comments from the central bank could trigger another selloff in the exchange, and the pound-dollar may fall back to the 38.2% Fibonacci retracement from the 2009 low to high around1.5680-1.5700 as it searches for support.

The Euro pared the previous day's advance, with the exchange rate slipping to a low of 1.3572, and the single-currency may trend lower throughout the day as fears surrounding the sovereign debt crisis intensifies. Spain's Finance Minister, Elena Salgado, said no more than EUR 20B will be required to recapitalize its banking system, which compares with the EUR 89B projection raised by Moody's Investor Services, but market participants certainly appear to be unconvinced by the new measures as European policy makers maintain a lackadaisical approach in addressing the debt crisis. As the EU struggle to restore investor confidence, the euro is likely to face increased headwind over the coming months, and the exchange rate may continue to consolidate over the next 24 hours of trading as the near-term rally fails to produce a test of 1.3700. In turn, the EUR/USD may have reached a top this week, and we may see a reversal unfold in the days ahead as the relative strength index falls back from a high of 67.

The U.S. dollar was mixed against its major counterparts on Tuesday, with the USD/JPY slipping to a low of 82.25, but we may see the greenback gain ground during the North American session as the economic docket is expected to reinforce an improved outlook for the future growth. The Conference Board's consumer confidence survey is expected to rebound to 54.0 in January from 52.5 in the previous month, and the data could spark a bullish reaction in the greenback as private sector spending remains one of the leading drivers of growth. However, as risk trends continues to dictate price action in the foreign exchange market, there could be a mixed reaction to the release, and a rise in market sentiment could curb demands for the U.S. dollar as investors move into higher-yielding currencies.

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Related Articles: Forex Weekly Forecast - 1.23.2011

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