Euro, British Pound Stumble as Investors Curb Appetite for Risk

The Euro weakened against the greenback for the third day and slipped to a low 1.4788 during the overnight session, and the lack of momentum to push back above the 20-Day SMA (1.4874) may lead the single-currency to retrace the advance from the previous month as investors scale back their appetite for risk.

Talking Points
• Japanese Yen: USD/JPY Slips Back Below 91.00
• Pound: Continues to Hold Narrow Range
• Euro: ECB Holds Improved Outlook for Bank Lending
• US Dollar: Durable Goods Orders, New Home Sales on Tap

Euro, British Pound Stumble as Investors Curb Appetite for Risk

The Euro weakened against the greenback for the third day and slipped to a low 1.4788 during the overnight session, and the lack of momentum to push back above the 20-Day SMA (1.4874) may lead the single-currency to retrace the advance from the previous month as investors scale back their appetite for risk. As a result, we may see the EUR/USD continue to trend lower and could test the 50-Day SMA at 1.4657 for near-term support however; a break below would expose the monthly low at 1.4480 as the reserve currency continues to benefit from safe-haven flows.

The economic docket showed import prices in Germany fell more than expected in September, with the index slipping 0.9% from the previous month amid expectations for a 0.7% decline, while the annualized rate tumbled 11.0% from the previous year after falling 10.9% in August. At the same time, a report by the European Central Bank showed a net 8% of commercial banks surveyed said they tightened lending standards for businesses in the third-quarter, which compares with 21% during the three-months through June, and credit conditions may continue to improve throughout the second-half of the year as policy makers take unprecedented steps to shore up the financial system. The ECB said that the survey “confirms the indications of a turning-point in the tightening trend,” but went onto say that “the cumulated net tightening during the financial turmoil has not yet start to reserve itself and remains very substantial.” As the central bank maintains a dovish outlook for inflation and continues to see strains in the banking system, the Governing Council is likely to sustain the expansion in monetary policy throughout the remainder of the year as the economic recovery remains fragile.

The British pound pulled back from the intraday high (1.6407) and slipped back below the 100-Day SMA (1.6365) to reach a low of 1.6311, and the GBP/USD is likely to remain range-bound going into the North American trade as investors weigh the outlook for future policy. Philip Hammond, the Shadow Chief Secretary of the HM Treasury, said that “it is essential” for the Bank of England to maintain a “relatively loose” monetary policy to foster a sustainable recovery, and pledged “to get the deficit under control,” which would allow the central bank to maintain an activist approach for policy. As the government presses on the central bank to uphold the expansion in monetary policy going into the following year, investors may continue to scale back expectations for higher interest rates in the U.K. as the BoE maintains a dovish outlook for inflation.

The greenback rallied against most of its major counterparts following the slump in risk appetite, and the reserve currency may continue to strengthen throughout the North American trading session as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the economic calendar is likely to spark increased volatility in the foreign exchange market as market participants anticipate private-sector spending to improve in September, and the data could spark a rise in risk sentiment as the outlook for global growth picks up. U.S. durable goods orders to forecasted to rise 1.0% in September after falling 2.4% in the previous month, while demands are expected to climb 0.7% after excluding transportation. At the same time, new home sales are projected to rise 2.6% from August and are anticipated to reach an annual pace of 440K from 429K in the previous month, and the rise in private spending could spur speculation for higher interest rates in the U.S. as policy makers see the economy emerging from the worst recession since the Great Depression.