The Euro pared the advance from the previous week, with the exchange rate slipping to a low of 1.2736, and the major currencies could face increased volatility going into the North American trade as U.S. traders come back on-line following the holiday weekend.
The EUR/USD failed to hold above the 20-Day SMA (1.2770) as investors scaled back their appetite for risk and the single-currency may test the 100-Day SMA at 1.2676 for short-term support as it struggles to maintain the rally carried over from the previous month. Meanwhile, European Union Economic and Monetary Affairs Commissioner Olli Rehn held a cautious outlook for the European economy and said that the “stronger solidarity” is required to guarantee financial stability, and went onto say that region is “not out of the woods yet” while speaking with reporters in Brussels.
Moreover, Mr. Rehn announced that the “other 14 nations” will aid in the bailout of Greece as Slovakia opposes the unprecedented measures to help the ailing economy balance its public finances, and noted that there’s been a “major improvement” in economic governance as policy makers take extraordinary steps to foster a sustainable recovery in the region. At the same time, European Central Bank board member Lorenzo Bini Smaghi said “excessive focus on the domestic economy may actually exacerbate the global economic and financial imbalances, ultimately making future global crises more likely and more severe” during a speech in Beijing, and argued that “international cooperation is required from global policy makers” as the world financial system remains fragile. Nevertheless, the economic docket showed factory orders in Germany plunged 2.2% in July amid projections for a 0.5% rise, while the previous month’s reading was revised higher to show a 3.6% rise in demands versus an initial forecasts for a 3.2% advance.As a result of the recent developments, the Governing Council is likely to maintain a dovish outlook for future policy and is widely expected to support the real economy throughout the remainder of the year as the central bank expects to see an “uneven” recovery going forward, and subdued price growth could lead the ECB to keep the benchmark interest rate at 1.00% going into 2011 as it aims to balance the risks for the region.
The British Pound extended the decline from the previous day and slipped to a low of 1.5316 during the European trade, and the GBP/USD may continue to trend lower going into the North American session as it maintains the downward trending channel from the August high (1.5997). As a result, the pound-dollar may continue to retrace the advance from June and look to test the 100-Day SMA (1.5130) over the near-term as market sentiment falters. At the same time, the Bank of England is widely expected to hold the key interest rate at 0.50% and maintain its asset purchase target at GBP 200B later this week as the central bank maintains a cautious outlook for the region, and we may see the exchange rate trade with the narrow range carried over from the previous week over the next 48 hours of trading as investors weigh the prospects for future policy. However, market participants may show little reaction to the rate decision as the MPC is likely to refrain from releasing a policy statement like we’ve seen over the past few months, but there meeting could spark increased volatility in the exchange rate if the central bank drops its dovish tone and sees an increased risk for inflation. Meanwhile, a report by the British Retail Consortium showed its gauge for household spending increased at an annualized pace of 2.8% in August after rising 2.6% in the previous month, while sales increased 3.0% during the three-months through August for the second consecutive month.
The greenback rallied against most of its major counterparts, while the USD/JPY pushed to a low of 83.72 on Tuesday as the Japanese Yen advanced across the board, and risk sentiment is likely to dictate price action throughout the day as the economic docket remains fairly light. Equity futures are foreshadowing a lower open for the U.S. market as a result of the sharp decline during the European trade, and the rise in risk aversion should continue to benefit the lower-yielding currencies as they benefit fro safe-haven flows.
