Euro Hits Fresh 2009 High, British Pound Weighed By Speculation For Further Easing

DailyFX
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The Euro advanced to a fresh yearly high of 1.5064 against the U.S. dollar following the rise in risk appetite, and the single-currency may continue to retrace the sell-off from the previous year as market sentiment improves.

Talking Points

  • Japanese Yen: Advances Across the Board
  • Pound: Weighed By Speculation for Further Easing
  • Euro: German Consumer Confidence Weakens in November
  • US Dollar: Chicago Fed National Activity Index on Tap

Euro Hits Fresh Yearly High, British Pound Weighed by Speculation for Further Easing

The Euro advanced to a fresh yearly high of 1.5064 against the U.S. dollar following the rise in risk appetite, and the single-currency may continue to retrace the sell-off from the previous year as market sentiment improves. Nevertheless, as the daily RSI approaches oversold territory, the EUR/USD may hold a narrow range throughout the week however, we may see the pair breakout of its range on Thursday following the advanced 3Q U.S. GDP report as economists forecast the world’s largest economy to emerge from the worst recession since the Great Depression.

Meanwhile, European Central Bank board member Christian Noyer held a weak outlook for global growth and said that the world economy continues to face many downside risks as the global banking system remain fragile. Mr. Noyer said financial regulation remains an urgent priority and argued that banks need increased overnight and stronger supervision, and went onto say that adverse scenarios may still materialize over the coming months as policy makers see a risk for a protracted recovery. The cautious outlook held by the Governing Council suggests that the ECB will maintain a loose policy going into the following year, and continue to hold a cautious tone throughout the first-half of 2010 as policy makers weigh the prospects for a sustainable recovery. Meanwhile, consumer confidence in Germany unexpectedly weakened in November, with the GfK survey falling back to 4.0 from a revised reading of 4.2 in the previous month, and households may turn increasingly pessimistic towards the economy over the coming months as policy makers expect growth and inflation to remain subdued going into the following year.

The British pound pulled back from the intraday high as former Bank of England board member David Blanchflower held a dovish outlook for future policy and continued saw scope for further easing as the economy failed to emerge from the recession in the third quarter. Mr. Blanchflower speculates the BoE to expand its asset purchase program by another GBP 50B and said that quantitative easing may have to reach GBP 250B as the real economy remains on its back. At the same time, the ex-BoE member said that the GDP reading for the U.K. is likely to be revised lower and that the recession looks more like the economic downturn during the 1930′s as he expects house prices to fall further, and went onto say that the stock market rally is beginning to look like a bubble as the outlook for global growth remains weak. Moreover, Mr. Blanchflower argued that BoE Governor Mervyn King has ‘consciously’ talked down the British pound in an effort to shore up the ailing economy and said that the government should do too much rather than too little as growth and inflation remains far from favorable. As a result, the British pound may continue to face increased selling pressures over the coming months as investors weigh the outlook for future policy, and speculation for further easing may lead the GBP/USD to retrace the advance from March as market participants scale back expectations for higher interest rates in the U.K.

The greenback weakened across the board as market participants moved into higher-yielding investments, and the currency may continue to face increased selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. Meanwhile, economists expect manufacturing to fall at a slower pace in October as they forecast the Dallas Fed activity index to fall 0.5% during the month after weakening 6.4% in September, and the data is likely to reinforce a weakened outlook for future growth as businesses continue to scale back on production and employment. At the same time, the Chicago Fed National Activity index is likely to spark volatility in the foreign exchange market as investors weigh the prospects for a sustainable recovery, and a dismal reading may lead the U.S. dollar to regain its footing as the reserve currency continues to benefit from safe-haven flows.

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