Talking Points

  • British Pound: U.K. Consumer Confidence Wanes
  • Euro: Inflation Expectations Accelerate in January
  • Canadian Dollar: Economic Activity To Expand 0.3%
  • U.S. Dollar:Personal Incomes, Spending on Tap

The EUR/USD pared the decline from Friday as inflation expectations in Europe advanced to a two-year high in January and the single-currency may push higher throughout the North American as interest rate expectations gather pace. The CPI estimate for the Euro-Zone advanced to an annualized pace of 2.4% in January to mark the highest reading since October 2008, and the rebound in price growth could lead the European Central Bank to reestablish its exit strategy later this year as it maintains its one and only mandate to ensure price stability. In turn, we may see the euro make another attempt to retrace the decline from back in November, but the uncertainties surrounding the economic outlook may continue to bear down on the exchange rate as the region faces an uneven recovery.

Ireland's central bank lowered its 2011 growth projection to 1.0% from an initial forecast for a 2.4% expansion, and curbed its outlook for inflation as it expects the ongoing slack within the region to dampen underlying price pressures for some time. As European policy makers maintain a relaxed approach in addressing the risks for growth and inflation, the single-currency may face additional headwinds ahead of the EU Summit in February, and the exchange rate may consolidate over the near-term as investors weigh the prospects for future policy. In light of the recent developments, we may see the EUR/USD make a run at the monthly high (1.3757), but the drop in risk appetite could dampen the rebound in exchange rate as market sentiment continues to dictate price action in the currency market.

The British Pound advanced to a high of 1.5912 on Monday as the Bank of England held a hawkish outlook for inflation, and the exchange rate may continue to retrace the decline from the previous week as investors speculate the central bank to gradually normalize monetary policy later this year. BoE member Martin Weale said that there's a powerful case for a modest rise in the bank rate according to an article that was published in the Guardian newspaper, and said that the cost of a small rise now would be lower than the eventual price of addressing higher ingrained inflation as price pressures in the U.K. continue to intensify. As the risk for inflation takes center stage, the GBP/USD should maintain the upward trend from earlier this month, but we may see price action struggle to hold above 1.6000 once again as the outlook for future growth remains subdued. In turn, we may see the GBP/USD may trend sideways going into February, but additional hawkish commentary from the BoE could help to prop up the exchange rate given the growing split within the MPC.

The greenback weakened against most of its counterparts, with the USD/CAD falling back to a low of 0.9983, but the U.S. dollar may regain its footing going into the North American trade as the economic docket is expected to reinforce an improved outlook for future growth. Personal incomes in the world's largest economy is forecasted to increase 0.4% in December after expanding 0.3% in the previous month, while personal spending is projected to advance another 0.5% during the same period following the 0.4% rise from back in November. As private sector activity accelerates, the data could spark a bullish reaction in the greenback, but a shift in risk sentiment could produce choppy price action in the exchange rate as equity futures foreshadow a higher open for the U.S. market.

Will the EUR/USD retrace the advance from September? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 01.31.11

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