Forex: Euro To Trade Heavy Ahead Of EU Summit, Loonie Battered By BoC

By David Song, Currency Analyst

Talking Points
  • Euro: EU Summit Disappoints, ECB Says Accommodative Policy ‘At The Limit’
  • British Pound: Falls Back From Fresh Monthly High, BoE To Maintain Dovish Tone
  • Canadian Dollar: BoC Keeps Rate On Hold, Lowers Fundamental Outlook
  • U.S. Dollar: Index Finds Support, Rebound To Gather Pace

Euro: EU Grows Increasingly Reliant On ECB, All Eyes On EU Summit

The Euro struggled tohold its ground on Tuesday, with the exchange rate falling backfrom an overnight high of 1.3959, and the single-currency maycontinue to trade heavy ahead of the EU Summit scheduled forWednesday as European policy makers struggle to meet on commonground. Italian Prime Minister SilvioBerlusconi’s Cabinet opposed takingadditional steps to balance its budget deficit even as the EUcalled for further measures to bolster the ailing economy, andhopes of addressing the sovereign debt crisis once and for all maycontinue to taper off as members of the monetary union continue tomove on their own agenda.

Meanwhile, there are reports that the EU is looking to include the European Central Bank’s asset purchase plan in the broader rescue package that is expected to be announced tomorrow, and we may see the ECB continue to expand its nonstandard measures as European policy makers become increasingly reliant on the central bank to shore up the economy. In turn, it seems as though the Governing Council may have little choice but to carry its easing cycle into the following year, and speculation for additional monetary support is likely to dampen the appeal of the single-currency as market participants weigh the prospects for future policy. As the EUR/USD struggles to hold above the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, we may see the exchange rate consolidate further over the next 24-hours of trading, and the single-currency may give back the advance from earlier this month should the second EU Summit disappoint.

British Pound: ComingUp Against 100-Day SMA, BoE Governor King Maintains DovishTone

The British Pound gave back the overnight advance to 1.6022 as the Bank of England maintain a dovish tone for monetary policy, and the sterling may face additional headwinds over the near-term as the central bank keeps the door open to expand its asset purchase program beyond the GBP 275B target. BoE Governor Mervyn King stood behind the MPC’s decision to conduct additional quantitative easing and said that the balance of risk has changed in recent months as subdued wage growth continues to dampen the outlook for inflation. As the central bank sees an increased risk of undershooting the 2% target for inflation, it seems as though we will see the BoE take additional steps to stimulate the ailing economy, and the central bank may carry its easing cycle into the following year in order to stem the risk of a double-dip recession. As the near-term rally in the GBP/USD tapers off ahead of the 100-Day SMA at 1.6041, we may the exchange rate consolidate over the remainder of the week, and the sterling is likely to face additional headwinds over the near-term as the fundamental outlook for the U.K. turns increasingly bleak.

Canadian Dollar: BoC Keeps Rate On Hold, Lowers Fundamental Outlook

The Canadian dollar sold off as the Bank of Canada lowered its economic assessment for the region, and the loonie may continue to give back the advance carried over from the previous week as the central bank turns increasing cautious towards the economy. As expect, the BoC kept the benchmark interest rate at 1.00%, but lowered its growth forecast as it expects the economy to operate below full capacity until the end of 2013. At the same time, the central bank left out its reference on withdrawing monetary stimulus as inflation is expected to stay below the 2% target over the next two-years, and the central bank may revert back to its easing cycle in order to balance the risks for the region. Indeed, the USD/CAD spiked to a high of 1.0075 following the rate decision, and the dollar-loonie may continue to retrace the decline from 1.0656 as it appears to be trading in an upward trend.

U.S. Dollar: Index Finds Support, Rebound To Gather Pace

The U.S. dollarregained its footing on Tuesday following the shift in marketsentiment, and the greenback should continue to trade higherthroughout the North American trade as the U.S. equities markettrades slower. In turn, we should see risk aversion continue togather pace throughout the remainder of the day, and the DowJones-FXCM U.S. Dollar Index (Ticker: USDOLLAR ) may retrace the sharpdecline from the previous week as it appears to be carving out abottom around 9,600. As optimism surrounding the EU Summitdeteriorates, the shift away from risk taking behavior may gatherpace over the next 24-hours of trading, and the reserve currencyshould continue to recoup the losses from earlier this month as itbenefits from safe-haven flows.

--- Written by David Song, CurrencyAnalyst

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

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

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RelatedArticles: Weekly Currency Trading Forecast

F X Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Consumer Confidence (OCT)

46.0

45.4

USD

14:00

10:00

House Price Index (MoM) (AUG)

0.2%

0.8%

USD

14:00

10:00

Richmond Fed Manufacturing Index (OCT)

-1

-6

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Consumer Prices Index (QoQ) (3Q)

0.7%

0.4%

Slows pace of growth since 2Q 2010.

NZD

21:45

Consumer Prices Index (YoY) (3Q)

4.9%

4.6%

AUD

23:00

Conference Board Leading Index (AUG)

--

-0.1%

Contracts for the second time in the last three-months.

JPY

5:00

Small Business Confidence (OCT)

--

46.4

Two-month low.

EUR

6:00

German GfK Consumer Confidence Survey (NOV)

5.1

5.3

Highest since August.

CHF

6:00

UBS Consumption Indicator (SEP)

--

0.84

Holds below 1 for the second month.

EUR

6:45

French Consumer Confidence Indicator (OCT)

78

82

Two-month high.

EUR

8:00

Italian Retail Sales s.a. (MoM) (AUG)

0.0%

0.0%

Holds flat for the second time this year.

EUR

8:00

Italian Retail Sales (YoY) (AUG)

-2.3%

-0.3%

GBP

8:30

BBA Loans for House Purchase (SEP)

36000

33130

Lowest since June.

GBP

8:30

Current Account (Pounds) (2Q)

-9.0B

-2.0B

Smallest deficit since 1Q 2003.

EUR

9:00

Italian Consumer Confidence Index s.a. (OCT)

97.6

92.9

Lowest since the series began in 1982.

CAD

12:30

Retail Sales (MoM) (AUG)

0.3%

0.5%

Increases for the fifth time this year.

CAD

12:30

Retail Sales Less Autos (MoM) (AUG)

0.3%

0.4%

CAD

13:00

Bank of Canada Interest Rate Decision

1.00%

1.00%

Lowers growth, inflation forecast.

USD

13:00

S&P/Case-Shiller Composite-20 s.a. (MoM) (AUG)

0.10%

-0.05%

Contracts for the fourth consecutive month.

USD

13:00

S&P/Case-Shiller Composite-20 (YoY) (AUG)

-3.50%

-3.80%

USD

13:00

S&P/Case-Shiller Home Price Index (AUG)

--

142.84
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/2011/10/25/Forex_Euro_To_Trade_Heavy_Ahead_Of_EU_Summit_Loonie_Battered_By_BoC.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.

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