After clearing 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, the EUR/USD remains well overbought as the daily relative strength index holds above 70, but the exchange rate may continue to push higher over the near-term given the bearish sentiment underlying the U.S. dollar. Meanwhile, European Central Bank board member Lorenzo Bini Smaghi said policy makers was a risk for a crowding-out effect as policy makers prepare to implement the new Basel III regulations, and said it could lead to increased “risk-taking behavior” once banks start to change their investment strategies.
Mr. Bini Smaghi went onto say that the shift in the financial system could affect the central bank’s ability to manage “short-term rates, and thus to signal its monetary policy stance,” and pledged to monitor “whether a shift in demand from short-term to longer-term operations will take place” as it aims to strengthen the financial system. Meanwhile, the economic docket showed confidence in the Euro-Zone unexpectedly increased to its highest level since 2006, with the index rising to 103.2 in September from 101.8 in the previous month, while the gauge for business sentiment advanced to 0.77 from a revised 0.72 in August to mark the highest reading since December 2007. As growth prospects improve, policy makers may raise their economic outlook going into 2011, but the ongoing weakness in the financial system paired with the implementation of the austerity measures could lead the ECB to maintain a loose policy stance throughout the beginning of the following year as it aims to stem the downside risks for the region. As a result, the euro may face strong headwinds going into the end of 2010 as the central bank continues to see a risk for an uneven recovery, and ECB President Jean-Claude Trichet may continue to talk down speculation for a rate hike as price growth remains subdued.
The British Pound fell back from a high of 1.5874 during the European trade and may test 1.5700, the 38.2% Fibonacci retracement from the 2009 low to high, for near-term support as it pares the sharp rally from the previous week. However, as price action holds within the previous day’s range, the GBP/USD may consolidate further going into the end of the week as the recent advance stalls just shy of 1.5900. Meanwhile, a report by the Bank of England showed mortgage approvals in the U.K. increased 47.4K in August after expanding a revised 48.3K in the previous month, while consumer credit unexpectedly slipped GBP 0.1B during the same period amid forecasts for a GBP 0.1B rise. Given the ongoing weakness within the real economy, the BoE may increase its willingness to expand quantitative easing over the coming months, and speculation for further easing could lead the GBP/USD to retrace the advance from earlier this month as investors weigh the prospects for future policy.
The greenback continued to weaken against most of its major counterparts, with the USD/JPY slipping to a fresh weekly low of 83.49, and the bearish sentiment behind the dollar could intensify going forward as investors maintain a cautious outlook for the world’s largest economy. As equity futures foreshadow a higher open for the U.S. market, a rise in risk appetite could fuel further weakness in the greenback, and the dollar-yen may continue to retrace the sharp rally from the Bank of Japan currency intervention as price action looks poised to test 83.00 again.
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