The EURUSD extended its two day advance during the overnight trade to reach an intraday high of 1.3730 amid speculation of an Irish bailout. At the same time, strong U.S. manufacturing figures yesterday are fueling investor sentiment. Meanwhile, International Monetary Fund Managing Director Dominique Strauss-Kahn spoke at a conference in Frankfurt today and said that the Greek government is bold, and is doing what is needed, while adding that growth in Europe is very low. At the same time, German Finance Minister Wolfgang Schaeuble said that Europe can act “any time” to avoid a crisis, and noted that consequences of a sovereign crisis would be “dramatic.” Indeed, the EURUSD has reversed course at the 50.0 percent Fibonacci retracement on the 11/25 to 6/7 downswing, with the next key level of resistance at 1.390, which is the 61.8 percent retracement. Going forward, we may witness price action test this level as risk appetite regains its footing. However, the euro will likely come back under pressure in the coming months as governments implement tough austerity measures in order to battle their high budget debts.
The economic docket during the overnight session was fairly muted as the only notable scheduled event was German producer prices. Figures rose 0.4 percent in October after climbing 0.3 percent the month prior amid expectations of 0.3 percent. At the same time, the annualized rate advanced 4.3 percent. Taking a look at the breakdown of the report, producer prices excluding energy climbed 0.2 percent from the previous month prior, while the heating oil component tapered the overall advance and dropped 2.3 percent. It is worth noting that the annual price of capital, consumer, and basic goods push higher for the month, indicating that domestic demand is strengthening. The report is of great importance due to the fact that higher producer prices are a leading indicator of inflationary pressures because producers tend to pass higher costs onto households. Looking ahead to next week’s trade, developments from Ireland will likely dictate price action as the calendar is relatively light.
The British pound extended yesterday’s advance and now looks poised to test 1.62 as technical indicators continue to point to further gains in the pair. The slow stochastic has crossed over to the upside, while the pair recently bounced off of the rising trend line dating back to May. The fundamental developments from the U.K. as of late have been better than expected and validate additional gains in the currency for the near term. Annualized inflation topped expectations in October, while the PMI manufacturing report rose to the highest level since July of this year. At the same time, the BoE has yet to follow the Fed and add onto their asset purchases, and the recent minutes of the meeting showed a three way split for the second consecutive month. Increased concerns surround Irish woes have rattled the U.K. due to the fact that banks in the region have a larger exposure to the Irish financial system than any other country. So long as Irish concerns are pushed to the side for the time being, market participants should not rule out further upside risks in the British pound heading into December.
The greenback weakened against most major currencies during the overnight session and may continue into next week’s trade as forex markets increase their appetite for risk. As the economic docket remains rather light for Friday, sentiment is likely to dictate price action for the major currencies, but speeches from BoE’s Paul Tucker and ECB’s Constancio could spark volatility in the currency markets as investors weigh the outlook for future growth.
By Michael Wright, Currency Analyst
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