British Pound Continues to Retrace
Talking Points
• Japanese Yen: BoJ to Maintain Accommodative Policy
• Pound: U.K. Home Prices Increase for Fourth Month
• Euro: ECB Concludes Swap with SNB
• US Dollar: Risk Trends to Drive Market Volatility
British Pound Continues to Retrace the Decline From December, Euro Remains Supported by 200-Day SMA
The British Pound crossed back above the 50-Day SMA (1.6338) during the overnight trade to reach a high of 1.6381, and the GBP/USD may continue to retrace the decline from December as market participants raise their appetite for risk. Meanwhile, Ernst & Young’s Item Club held a cautious outlook for the U.K. and said that the region faces a “challenging” year as households face a weakening labor market paired with tightening credit conditions, and forecasts the growth rate to increase at an annual pace of 1.0% in 2010 as the expansion in monetary and fiscal policy continues to feed through the real economy.
At the same time, the Rightmove home price index gained 0.4% in January after tumbling 2.2% during the previous month, while the annualized rate increased 4.1% from the previous year after rising 1.7% in December to mark the fourth consecutive rise. The breakdown of the report showed home prices in six of the ten regions increased during the month as “limited supply of sellers is being outstripped by buyer demand,” and conditions are likely to improve going forward as the economy emerges from the worst recession since the post-war period. Nevertheless, the slew of U.K. data scheduled for this week is likely to stoke increased volatility in the exchange rate, and we may see a major breakout following the Bank of England meeting minutes due out on Wednesday at 9:30 GMT as investors weigh the outlook for future policy.
The Euro tipped lower against the greenback for the third day, with the exchange rate slipping to a low of 1.4333, and the EUR/USD may continue to trend sideways over the week as the pair remains supported by the 200-Day SMA at 1.4283. Nevertheless, the European Central Bank announced it will discontinue swap operations with the Swiss National Bank “against the background of declining demand and improved conditions in the funding markets,” and the central bank may continue to normalize policy over the coming months as the Governing Council holds an improved outlook for the region. Moreover, the Bundesbank said that the economic recovery in Germany remains ‘fundamentally intact,’ but went onto say that the pace of expansion was significantly slower in the fourth quarter of 2009 as activity in the domestic economy remains weak.
U.S. dollar price action was mixed across the board, with the USD/JPY extending the decline from the previous week to reach a low of 90.65, and risk trends are likely to dictate price action going into the North American trade as the economic calendar remains fairly light for Monday. U.S. equity futures are slightly higher on the day, led by a 0.12% rise in the S&P 500, and a rise in risk appetite is likely to weigh on the greenback as it remains the most popular funding-currency next to the Japanese Yen.
