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Euro, British Pound Correction On

Trader sentiment continued to firm up on Thursday as the bond auction in France calmed market jitters, but the rise in risk appetite appears to be tapering off as the fundamental outlook for the global economy turns increasingly bleak. 

Talking Points

• Euro: France’s Credit Rating Still At Risk, ECB Says Asset Purchases ‘Limited’
• British Pound: BoE Turns Increasingly Cautious, Sees Risk Of ‘Systemic Crisis’
• U.S. Dollar: Weakens Across The Board, U.S. Growth Prospects Improve

Euro: France’s Credit Rating Still At Risk, ECB Says Asset Purchases ‘Limited’

Although the EUR/USD advanced to a high of 1.3520 on Thursday, the single currency may consolidate going into the end of the week as it holds within the previous day’s range. Indeed, France sold EUR 1.57B of 10-Year bonds yielding 3.18%, which compares to the 3.22% offered back in November, but the ongoing turmoil in the financial system continues to instill a bearish outlook for the Euro as Europe’s second-largest economy faces a risk of a credit rating downgrade.

Fitch Ratings’ head of sovereign rating, David Riley, warned France’s AAA credit rating may be at risk should the debt crisis intensify, and went onto say that the European Central Bank ‘is the only pan-European institution that can provide the bridge financing to the new euro zone’ as the EU struggles to nail out the details of leveraging the European Financial Stability Facility. In response, ECB President Mario Draghi said drawing up a ‘new fiscal compact’ is the most important step in restoring investor confidence, and argued that the central bank’s nonstandard measures ‘can only be limited’ while speaking to the European Parliament in Brussels. As the asset purchase program comes under increased scrutiny, we may see the ECB restore to another rate cut in December, and we expect the Governing Council carry its easing cycle into the following year as the region braces for a ‘mild recession.’ As interest expectations falter, the outlook for the Euro remains bearish, and we may see the EUR/USD give back the advance from earlier this week as the 20-Day SMA (1.3519) holds up as near-term resistance.

British Pound: BoE Turns Increasingly Cautious, Sees Risk Of ‘Systemic Crisis’

The British Pound struggled to maintain the overnight advance to 1.5743 as the Bank of England turned increasingly cautious towards the economy, and we may see the sterling trade heavy over the next 24-hours of trading as risk sentiment appears to be tapering off. BoE Governor Mervyn King encouraged commercial banks in the U.K. to strengthen their balance sheets as the central bank sees an increased threat of a ‘systemic crisis,’ and went onto say that Britain is working on ‘a wide range of contingency plans’ as European policy makers struggle to stem the risk for contagion. In light of the recent comments, it seems as though the MPC is ready and willing to expand its Asset Purchase Facility beyond the GBP 275B target, and we may see the central bank ramp up the program by another GBP 100-150B in order to shield the economy. As the GBP/USD marks another failed run at the 20-Day SMA (1.5767), the recent pullback in the exchange rate could turn into a larger correction, and the pound-dollar may give back the rebound from 1.5422 as the BoE talks up speculation for more easing.

U.S. Dollar: Consolidates Ahead Of NFPs, Employment To Increase 125K

The greenback struggled to hold its ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 9,884, and the reserve currency may consolidate over the next 24-hours of trading as the highly anticipated Non-Farm Payrolls report comes into focus. Indeed, the U.S. economy is expected to add another 125K jobs in November, and the pickup in job growth is likely to dampen the FOMC’s scope to implement another large-scale asset purchase program as Fed officials expect the economic recovery to gradually gather pace over the coming months. As the data props up the outlook for future growth, market participants may show a bullish U.S. dollar reaction to a positive NFP print, but we may risk sentiment drive price action following the release as investors continue to treat the reserve currency as a safe-haven.

--- 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" todsong@dailyfx.com.

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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
EUR	17:00	12:00	Italian New Car Registrations (YoY) (NOV)		-5.5%
EUR	18:00	13:00	Italian Budget Balance (euros) (NOV)		-1.9B
EUR	18:00	13:00	Italian Budget Balance (euros) (YTD) (NOV)		-60.8B
USD	22:00	17:00	Total Vehicle Sales (NOV)	13.40M	13.20M
USD	22:00	17:00	Domestic Vehicle Sales (NOV)	10.40M	10.29M

Currency	GMT	Release	Expected	Actual	Comments
NZD	21:45	Terms of Trade Index (QoQ) (3Q)	1.1%	-0.7%	Falls for the first time since 3Q 2009.
AUD	22:30	AiG Performance of Manufacturing Index (NOV)	--	47.8	Contracts for the fifth month.
NZD	0:00	ANZ Commodity Price (NOV)	--	-1.0%	Declines for the sixth month.
AUD	0:30	Retail Sales s.a. (MoM) (OCT)	0.4%	0.2%	Increases for the fourth time.
AUD	0:30	Building Approvals (MoM) (OCT)	3.3%	-10.7%	Weakens for second month.
AUD	0:30	Building Approvals (YoY) (OCT)	-14.4%	-29.8%
CNY	1:00	PMI Manufacturing (NOV)	49.8	49.0	Contracts for the first time since February 2009.
CNY	2:30	HSBC PMI Manufacturing (NOV)	--	47.7
JPY	5:00	Vehicle Sales (YoY) (NOV)	--	24.1%	Rises for third month.
AUD	5:30	RBA Commodity Price Index (NOV)	--	107.7	Slows for the 11thstraight month.
AUD	5:30	RBA Commodity Index SDR (YoY) (NOV)	--	18.1%
EUR	6:30	French Mainland Unemployment Change (3Q)	--	37K	Employment climbs for the first time since 3Q 2010.
EUR	6:30	French ILO Mainland Unemployment Rate (3Q)	9.3%	9.3%
EUR	6:30	French ILO Unemployment Rate (3Q)	9.7%	9.7%
CHF	6:45	Gross Domestic Product (QoQ) (3Q)	0.1%	0.2%	Slowest pace of growth since 2Q 2009.
CHF	6:45	Gross Domestic Product (YoY) (3Q)	1.8%	1.3%
CHF	8:30	SVME-Purchasing Managers Index (NOV)	46.6	44.8	Weakens for third month.
EUR	8:45	Italian PMI Manufacturing (NOV)	42.8	44.0	Contracts for the fourth straight month.
EUR	8:50	French PMI Manufacturing (NOV F)	47.6	47.3
EUR	8:55	German PMI Manufacturing (NOV F)	47.9	47.9
EUR	9:00	Euro-Zone PMI Manufacturing (NOV F)	46.4	46.4
GBP	9:30	Purchasing Manager Index Manufacturing (NOV)	47.0	47.6	Falls for the fourth time this year.
USD	13:30	Initial Jobless Claims (NOV 26)	390K	402K	Above 400K for first time since October.
USD	13:30	Continuing Claims (NOV 19)	3650K	3740K	Holds above 3700K for second week.
USD	15:00	Construction Spending (MoM) (OCT)	0.3%	0.8%	Rises for third month.
USD	15:00	ISM Manufacturing (NOV)	51.7	52.7	Fastest pace of growth since June.
USD	15:00	ISM Prices Paid (NOV)	45.0	45.0

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