The euro bounced back against the greenback after slipping below 1.4200 during the overnight session however, the lack of momentum to cross back above the 20-Day moving average may keep the EUR/USD in a narrow range going into the U.S. trade

Talking Points

              •    Japanese Yen: Strengthens Across the Board
              •    Pound: Construction PMI Fails to Impress
              •    Euro: 2Q GDP Contacts, PPI Falters
              •    US Dollar: FOMC Minutes on Tap

The euro bounced back against the greenback after slipping below 1.4200 during the overnight session however, the lack of momentum to cross back above the 20-Day moving average may keep the EUR/USD in a narrow range going into the U.S. trade. Meanwhile, the preliminary 2Q GDP for the Euro-Zone showed economic activity slipped 0.1% from the first three-months of the year, with the annual rate of growth falling 4.7% from the previous year amid an initial forecast for a 4.6% contraction, and growth prospects are likely to remain subdued throughout the second-half of the year as the European Central Bank forecasts  

The breakdown of the GDP report showed household consumption increased 0.2% amid expectations for a flat reading, while business investments slipped 1.3% from the first quarter compared with an initial forecast for a 1.7% contraction, while government spending rose 0.4% during the three months through June, and extraordinary efforts taken on by the government should help to stimulate the ailing economy as the ECB holds borrowing costs at the record-low and commits EUR 60B in covered bond purchases. At the same time, a report by the European Union’s statistics office showed producer prices plunged at an annual rate of 8.5% in July to mark the biggest decline since recordkeeping began in 1981, while prices slipped 0.8% from the previous month amid projections for a 0.6% drop in the PPI. As price pressures remain subdued, the European Central Bank is widely expected to hold the benchmark interest rate at 1.00% on Thursday and is anticipated to maintain its asset purchase scheme to stem the downside risks for growth and inflation however, comments following the rate decision is likely to spark volatility in the currency market as investors weigh the outlook for future policy.

The British pound retraced the overnight decline to hold above 1.6200, and the rebound in market sentiment may push the GBP/USD push higher over the remainder of the week as investors increase their appetite for higher yielding assets. The pound-dollar continued to find near-term support ahead of the 100-Day moving average (1.6031) after falling to a low of 1.6113 earlier this week, and risk trends are likely to drive price action for the pair as the economic docket for the U.K. remains fairly light until the following week.  Nevertheless, the economic docket showed building activity fell at its slowest pace in 18 months, with the PMI reading tipping higher to 47.7 in August from 47.0 in the previous month, and the data encourages an enhanced outlook for future growth as policy makers anticipate economic activity to improve throughout the year.

The U.S. dollar lost ground during the overnight session following the rise in risk appetite however, as equity futures foreshadows a lower open of the U.S. market, a downturn in market sentiment could lead the greenback higher over the next 24 hours of trading. At the same time, the economic calendar is expected to show a 250K drop in private employment, while factory orders are projected to increase 2.2% in July but nevertheless, we may see the greenback hold steady ahead of the FOMC minutes as investors weigh the outlook for future policy. The Fed is likely to hold an improved outlook for growth and inflation as the economic downturn nears a bottom however, as mounting bank failures continue to pose a threat to financial stability, the statement could may highlight the ongoing weakness in bank lending, which could stoke fears of a slower recovery as households and businesses face tightening credit conditions.

Will The EUR/USD Remain Above 1.4000? Join us in the Forurm

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Forex Weekly Trading Forecast - 08.31.09

To discuss this report contact David Song, Currency Analyst: [email protected]