FX: Euro Slips to Five-Month Low, British Pound Extends Decline as Budget Deficit Widens at Record Pace
The Euro extended the decline from the previous week and slipped to a fresh monthly low of 1.4042 during the overnight trade as the U.S Dollar rallied across the board, and the single-currency may continue to trend lower over the remainder of the month as the European Central Bank maintains a dovish outlook for future policy.
Talking Points
• Japanese Yen: Mixed Across the Board
• Pound: U.K. Posts Record December Deficit
• Euro: ECB Maintains Dovish Outlook for Future Policy
• US Dollar: Leading Indicators, Philadelphia Fed on Tap
Euro Slips to Five-Month Low, British Pound Extends Decline as Budget Deficit Widens at Record Pace
The Euro extended the decline from the previous week and slipped to a fresh monthly low of 1.4042 during the overnight trade as the U.S Dollar rallied across the board, and the single-currency may continue to trend lower over the remainder of the month as the European Central Bank maintains a dovish outlook for future policy. The central bank reiterated interest rates remain appropriate during its monthly report, and expects to a see an uneven recovery this year as the fiscal stimulus begins to taper off.
Moreover, the ECB pledged to normalize policy this year and will continue to gradually unwind the emergency measures taken during the financial crisis, and went onto say that the sharp rise in public borrowing carries a “risk of triggering rapid changes in market sentiment, leading to less favorable medium and long-term market interest rates.” At the same time, the central bank expects base effects from energy and food “to make a non-negligible contribution to overall inflation developments” as economic activity remains subdued, but went onto say that the outlook for inflation remains “uncertain and cannot be assessed mechanically on the basis of base effects alone.” Meanwhile, manufacturing in the Euro-Zone expanded at a faster pace in January as the purchasing manager index increased to 52.0 from 51.6 in the previous month, while service-based activity grew at a slower pace during the same period, which pushed the PMI down to 52.3 from 53.6 in December. As a result, the composite index slipped to 53.6 from 54.2 amid expectations for a rise to 54.4, and fears of a protracted recovery may lead the ECB to maintain its current policy throughout the first-half of 2010 as the central bank aims to balance the risks for growth and inflation.
The British Pound tumbled lower against the greenback as the U.K. posted its largest December budget deficit since recordkeeping began in 1993, with the exchange rate crossing back below the 200-Day SMA (1.6171) to reach a low of 1.6133. Public sector net borrowing increased GBP 15.7B in December after rising a revised GBP 14.6B in the previous month, which fell short of expectations for a GBP 19.0B rise, while the M4 money supply unexpectedly contracted 1.1% during the same period after expanding 0.1% in November. A separate report showed mortgage approvals by the major banks in the U.K. slipped to 62K in December from 63K amid projections for a rise in 65K, and the Bank of England may continue to support the economy throughout the first-half of the year as households face fading demands for employment paired with tightening credit standards. Meanwhile, the Confederation of British Industry’s manufacturing survey improved in January, with the gage for total orders narrowing to -39 from -42 in the previous month, while the gauge for foreign demands increased to -33 from -41 in December.
The greenback rallied across the board, with the USD/JPY advancing for the fourth day to reach a fresh weekly high of 91.84, and the reserve currency may continue to appreciate going into the North American trade as it benefits from the rise in safe-haven flows. Nevertheless, the leading indicator for the U.S. is expected to increase 0.7% in December after rising 0.9% in the previous month, while the Philadelphia Fed’s manufacturing index is forecasted to weaken to 18.0 in January from 22.5 in the month prior, and the data could stoke increased volatility in the exchange rate as investors weigh the prospects for a sustainable recovery in the world’s largest economy.
