By David Song, Currency Analyst

Talking Points
  • Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction
  • British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate
  • U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace

Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction

The European Central Bank’s struck a cautious outlook in its monthly report and reiterated that the economic outlook remains tilted to the ‘downside’ as the region faces a slowing recovery. At the same time, ECB board member Jozef Makuch highlighted an increased risk of a double-dip recession, noting that the economy may contract over the medium-term should ‘downside risks materialize.

In addition, the EU warned that some commercial banks may need a 9 percent capital buffer to weather the ongoing turmoil within the financial markets, and we may see the ECB take additional steps to shore up the ailing economy as it aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, market participants still see the Governing Council scaling back the benchmark interest rate from 1.50 percent over the next 12-months, and the committee may carry its easing cycle into the following year as the outlook for growth and inflation deteriorate. As the near-term rally in the EUR/USD tapers off ahead of the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, the pullback from 1.3832 may gather pace over the remainder of the week, and the single-currency is likely to face additional headwinds over the near-term as European policy makers struggle to restore investor confidence. In turn, the near-term forecast for the Euro remains bearish, and the euro-dollar may threaten the rebound from 1.3145 as the fundamental outlook for the region deteriorates.

British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate

The British Pound struggled to hold its ground on Thursday as the Bank of England talked up speculation for additional monetary support, and the sterling may trade heavy over the coming days as the central bank maintains a highly dovish outlook for future policy. BoE board member Charles Bean said the central bank may ‘undertake further purchases’ as the region faces an increased risk of falling back into a recession, and went onto say that the European debt crisis risks could ‘lead to a seizing up of the financial system’ according to an interview with the Guardian newspaper. As the MPC steps up its effort to shield the U.K. economy, we may see a growing argument to expand the asset purchase program beyond the GBP 275B target, and speculation for further easing is likely to weigh on the exchange rate as market participants weigh the outlook for monetary policy. In turn, the GBP/USD may trade heavy ahead of the BoE minutes on tap for the following week, but the exchange rate may give back the rebound from 1.5273 should the central bank keep the door open to expand policy further.

U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace

The greenback gained ground following the shift in market sentiment, and the reserve currency may continue recoup the losses from earlier this week as it benefits from safe-haven flows. As the U.S. stock market opens lower, we should see risk aversion gather pace throughout the North American trade, and risk trends are likely to heavily influence price action for the major currencies as the economic docket remains fairly light for Thursday. As global policy makers continue to cast a dour outlook for global growth, the shift away from risk-taking behavior should gather pace over the remainder of the week, and the greenback may resume the upward trend from the previous month as the fundamental outlook for the global economy deteriorates.

--- Written by David Song, Currency Analyst

To contact David , e-mail dsong @dailyfx.com. Follow me on Twitter at @ DavidJSong

To be added to David 's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong @dailyfx.com.

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Related Articles: Weekly Currency Trading Forecast

F X Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:45

9:45

Bloomberg Consumer Comfort Index (OCT 9)

--

-50.2

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (OCT 7)

800K

-4679K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (OCT 7)

250K

-1137K

USD

14:30

10:30

DOE U.S. Distillate Inventory (OCT 7)

-500K

-744K

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:30

Business NZ Performance of Manufacturing Index (SEP)

--

50.8

Lowest since March.

NZD

21:45

Food Prices (MoM) (SEP)

--

-1.0%

Falls for second month.

JPY

23:50

Bank Lending Banks ex Trust (YoY) (SEP)

-0.5%

-0.3%

Contracts for 22 straight months.

JPY

23:50

Bank Lending Banks inc Trusts (YoY) (SEP)

--

-0.3%

JPY

23:50

Tertiary Industry Index (MoM) (AUG)

-0.3%

-0.2%

Weakens for second month.

AUD

0:30

Employment Change (SEP)

10.0K

20.4K

Rises for the first time since June. Biggest advance since March.

AUD

0:30

Unemployment Rate (SEP)

5.3%

5.2%

AUD

0:30

Full Time Employment Change (SEP)

--

10.8K

AUD

0:30

Part Time Employment Change (SEP)

--

9.6K

AUD

0:30

Participation Rate (SEP)

65.6%

65.6%

CNY

2:00

Trade Balance (USD) (SEP)

$16.90B

$14.51B

Surplus narrows for second month, exports grew the lease since February

CNY

2:00

Exports (YoY) (SEP)

20.8%

17.1%

CNY

2:00

Imports (YoY) (SEP)

24.6%

20.9%

CNY

2:00

Business Climate Index (3Q)

--

133.4

Lowest since the first quarter.

CNY

2:00

Entrepreneur Confidence Index (3Q)

--

129.4

Lowest since 4Q 2009.

JPY

4:00

Tokyo Condominium Sales (YoY) (SEP)

--

16.7%

Biggest rise since February.

EUR

6:00

German Consumer Price Index (MoM) (SEP F)

0.1%

0.1%

Fastest pace of growth since September 2008.

EUR

6:00

German Consumer Price Index (YoY) (SEP F)

2.6%

2.6%

EUR

6:00

German CPI - EU Harmonised (MoM) (SEP F)

0.1%

0.2%

EUR

6:00

German CPI - EU Harmonised (YoY) (SEP F)

2.8%

2.9%

CHF

7:15

Producer & Import Prices (MoM) (SEP)

-0.1%

-0.1%

Declines for the fifth month.

CHF

7:15

Producer & Import Prices (YoY) (SEP)

-1.9%

-2.0%

GBP

8:30

Visible Trade Balance (Pounds) (AUG)

-8.800B

-7.768B

Deficit narrows for second straight month.

GBP

8:30

Trade Balance Non EU (Pounds) (AUG)

-5.350B

-4.867B

GBP

8:30

Total Trade Balance (Pounds) (AUG)

-4.250B

-1.877B

CAD

12:30

International Merchandise Trade (Canadian dollar) (AUG)

-1.00B

-0.62B

Deficit widens for the first time since May.

USD

12:30

Trade Balance (AUG)

-$46.0B

-45.6B

Holds steady for second month.

USD

12:30

Initial Jobless Claims (OCT 8)

405K

404K

Above 400K for second week.

USD

12:30

Continuing Claims (OCT 1)

3710K

3670K

Lowest since April.
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2011/10/13/Forex_Euro_Sterling_Correction_To_Gather_Pace_On_Increased_Fears.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.