Talking Points

  • Japanese Yen: Under Pressure Against Major Counterparts
  • British Pound: Pares Decline From Dismal 4Q GDP Report
  • Euro: ECB Drops Dovish Tone, Looks At Imported Inflation
  • U.S. Dollar:Pending Home Sales on Tap

The Euro advanced to a fresh monthly high of 1.3757 on Thursday and the single-currency may continue to retrace the decline from back in November as the central bank adopts a hawkish outlook for inflation. European Central Bank board member Lorenzo Bini Smaghi said imported inflation can no longer be ignored while speaking in Bologna, and the rise in global commodity prices could lead the Governing Council to start normalizing monetary policy in the second-half of 2011 as it maintains its one and only mandate to ensure price stability. At the same time, central bank President Jean Claude Trichet noted that the ECB has responsibility for second round effects as rising energy prices heighten the risk for inflation, and the hawkish rhetoric could translate into further euro strength as investors speculate the Governing Council to implement its exit strategy later this year.

As fears surrounding the European debt crisis subside, the EUR/USD may continue to push higher ahead of the EU Summit in February, but the pair may consolidate going into the end of the week given the slew of market-moving data scheduled for Friday. The near-term rally in the EUR/USD appears to be overbought as the relative strength index holds just below 70, and we may see a small correction unfold before the exchange rate continues to push higher over the near-term. However, as European policy makers retain a relaxed approach in addressing the sovereign debt crisis, the euro is likely to face additional headwinds this year, and balancing the risk for the real economy will certainly become increased challenge for the ECB as the region faces an uneven recovery.

The British Pound continued to pare the decline from earlier this week, with the exchange rate rallying to a high of 1.5987, and the sterling may push higher over the near-term as investors speculate the Bank of England to lift the benchmark interest rate off the record-low later this year. However, as the GBP/USD struggles to hold above 1.6000, its attempt to retrace the sharp decline from the end of 2010 could be short-lived, and the pair may face range-bound price action going into February as the central bank struggles to meet on common ground. As the economic docket for the U.K. remains bare for the remainder of the week, risk sentiment should dictate price action for the GBP/USD over the next 24-hours of trading, but the 4Q GDP report for the world's largest economy is likely to spark increased volatility in the exchange rate as economic activity in the U.S. outpaces the recovery in the U.K.

U.S. dollar price action was mixed on Thursday, with the USD/JPY advancing to a high of 83.20, but the reserve currency may regain its footing going into the following week as the recovery in the world's largest economy gathers pace. Indeed, we saw the dollar lose ground as demands for U.S. durable goods unexpectedly slipped 2.5% in December, while initial and continuing jobless claims pushed higher during January. However, we may see the greenback bounce back later today as pending home sales in the U.S. are expected to increase for the third consecutive month in December. At the same time, markets may show little reaction to the data as investors wait for the advance 4Q GDP report, which is expected to show the growth rate expanding at an annualized pace of 3.5% during the last three-months of 2010.

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