Talking Points

  • Japanese Yen: Weighed By Risk Appetite
  • British Pound: U.K. Manufacturing Expands At Record Pace
  • Euro: German Unemployment Slips To 18-Year Low
  • U.S. Dollar:ISM Manufacturing, Construction Spending on Tap

The Euro rallied to a high of 1.3774 on Tuesday as the economic docket reinforced an improved outlook for future growth, and the single-currency may push higher going into the North American trade as the EU looks at alternative measures to restore investor confidence. Unemployment in Germany weakened 13K in January amid forecasts for a 10K drop, while the jobless rate unexpectedly slipped to 7.4% from 7.5% in December to mark the lowest reading since November 1992. At the same time, manufacturing in the Euro-Zone expanded at a faster pace during the same period, with the PMI reading advancing to 57.3 from 57.1 in the previous month, and the recent developments may encourage the European Central Bank to reestablish its exit strategy later this year as the economic recovery gathers pace.

Nevertheless, according to an article on Bloomberg News, the EU is close to reaching an agreement to empower the European Financial Stability Facility with the ability to directly purchase government debt, and the group may look to take additional steps to stem the risk for contagion as the governments operating under the single-currency struggle to manage their public finances. However, the lackadaisical approach in addressing the debt crisis may continue to bear down on market sentiment, and the euro could face additional headwinds over the near-term if we see the EU fail to deliver a concrete solution. As the near-term rally in the EUR/USD fails to push the relative strength index above 70, we may see the exchange rate consolidate ahead of the EU Summit later this week, but the slew of market-moving data scheduled for the remainder of the week is likely to produce increased volatility across the major currencies as investors weigh the outlook for future growth.

The British Pound advanced to a fresh yearly high of 1.6141 despite the slew of mixed data out of the U.K., and the GBP/USD may continue to retrace the decline from back in November as investors speculate the Bank of England to gradually normalize monetary policy later this year. Mortgage approvals in the U.K. increased 42.6K in December to mark the slowest pace of growth since March 2009, while manufacturing expanded at a record pace in January, with the PMI reading advancing to 62.0 in January from a revised 58.7 in the previous month. As the recovery gradually gathers pace, the National Institute of Economic and Social Research expects the BoE to hike the benchmark interest rate three times this year, but there could be a growing split within the MPC as the tough austerity measures dampens the outlook for future growth. As the GBP/USD maintains the upward trend from earlier this month, the pair looks poised to test 1.6200-20, the 23.6% Fibonacci retracement from the 2009 low to high, but we may see the pair consolidate over the near-term if we see the daily RSI continue to hold below 70.

The greenback lost ground against all of its major counterparts on Tuesday, with the USD/JPY tumbling to a low of 81.46, but we may see the U.S. dollar recoup the overnight losses as manufacturing in the world's largest economy is expected to expand at a faster pace in January. The ISM Manufacturing index is forecasted to increase to 58.0 from 57.0 in December, and businesses may continue to ramp up their rate of production this year as the rebound in economic activity picks up steam. However, as equity futures foreshadow a higher open for the U.S. market, the rise in risk appetite may dampen demands for the greenback, and the dollar may struggle to hold its ground as risk sentiment continues to dictate price action in the currency market.

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