Talking Points

  • Japanese Yen: Mixed Against Major Counterparts
  • British Pound: Retail Spending Jumps In January
  • Euro: German Business Confidences Hits Record High
  • U.S. Dollar:Risk To Drive Price Action On Light Calendar

The euro fell back from a high of 1.3715 as Germany's central bank opposed empowering the European Financial Stability Facility with the ability to directly purchase government bonds in the secondary market, and fears surrounding the sovereign debt crisis may continue to bear down on the exchange rate as the EU struggles to meet on common ground. As European policy makers maintain a relaxed approach in addressing the sovereign debt crisis, the euro is likely to face increased headwinds ahead of the EU Summit in March, and the EUR/USD may continue to trend lower over the next 24 hours of trading as it pares the advance from the previous week. Nevertheless, ECB board member Athanasios Orphanides saw a risk for inflation to stay above the 2 percent target longer than initial expected as higher food and energy prices continue to fuel price growth, and went onto say that the central bank will take the appropriate actions to ensure price stability according to an interview with the Wall Street Journal.

As manufacturing and service-based activity expands at a faster pace in February, with business confidence unexpectedly advancing to a record-high, the recent developments could encourage the ECB to reestablish its exit strategy later this year as the economic recovery in Europe gradually gathers pace. However, the Governing Council may look to support the real economy throughout the first-half of the year as the tough austerity measures dampen the prospects for future growth, and the central bank may retain its wait-and-see approach over the coming months as the fundamental outlook remains clouded with high uncertainty. In turn, the EUR/USD may face range-bound price action throughout the last days of February, but the euro-dollar may face additional headwinds going into March as the risk for contagion intensifies.

The British Pound pared the overnight rally to 1.6258 as investors scaled back their appetite for risk, but the exchange rate may hold steady going into the North American trade as it holds within the previous day's range. As the Bank of England is scheduled to release its policy meeting later this week, the small pullback in the GBP/USD could be short-lived, and the British Pound may push higher throughout the final days of the month as investors speculate the central bank to gradually normalize monetary policy this year. Indeed, we may see a growing shift within the MPC as price growth in the U.K. continues to gather pace, and the central bank may show an increased willingness to lift the benchmark interest rate off the record-low as it aims to balance the risks for the region. As a result, the GBP/USD may trend sideways over the next 24 hours of trading, but hawkish comments from the BoE could lead the pound-dollar to make another run at 1.6300 as interest rate expectations gather pace.

The greenback weakened against most of its major counterparts on Monday, with the USD/JPY advancing to a high of 83.20, but the major currencies could face mixed price action going into the North American trade as the U.S. market remains off line in observance of Presidents Day. As the economic docket remains fairly light for the next 12 hours of trading, we are likely to see risk sentiment dictate price action across the currency market, and the greenback may regain its footing throughout the day if we see market participants continue to scale back their appetite for yields.

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Related Articles: Forex Weekly Trading Forecast - 02.14.2011

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