Talking Points
- Japanese Yen: Mixed Against Majors
- British Pound: U.K. Households Continue To Pay Back Mortgage Loans
- Euro: Private Lending, Money Supply Expand At Faster Pace
- U.S. Dollar:Risk Trends To Drive Price Action On Light Calendar
The U.S. dollar continued to lose ground against its major counterparts during the holiday trade, and the greenback may face increased headwinds going into the North American session as investors diversify away from the reserve currency. However, as market participation remains fairly low, the major currencies are likely to face choppy price action ahead of the New Year, and investors may continue to dump the U.S. dollar in January as market participants speculate the Fed to conduct additional monetary easing over the following year. The EUR/USD held a narrow range on Wednesday, with the exchange rate falling back from a high of 1.3156, and the pair is likely to trend steady going into the end of the week as price action remains confined by the 20 (1.3214) and 200 (1.3084) Day moving averages.
Meanwhile, a report by the European Central Bank showed private sector loans in the Euro-Zone increased at an annualized pace of 2.0% in November to mark the fastest pace of growth since April 2009, while the M3 money supply expanded 1.9% during the same period, which exceeded forecasts for a 1.6% advance. In addition, the headline reading for German inflation increased to an annualized 1.7% in December amid projections for a 1.5% print, and the rise in price growth paired with the improvement in private lending could generate a hawkish outlook for future policy as the ECB maintains it’s one and only mandate to ensure price stability. However, as European policy makers expect the tough austerity measures to bear down on the recovery, the Governing Council may continue to talk down the risks for inflation in 2011, and the central bank may continue to delay its exit strategy throughout the following year as they struggle to stem the risks for contagion.
The British Pound pared the overnight advance to 1.5411, with the exchange rate falling back below the 200-Day SMA at 1.5398, and the GBP/USD may continue to push lower over the near-term as the economic development casts doubts for a sustainable recovery in the U.K. Households in Britain paid off GBP6.1B in mortgage loans during the third quarter after adding a revised GBP 5.8B to their home equity during the three-months through June, and the ongoing weakness within the private sector certainly hampers the outlook for future growth as U.K. policy makers expect the tough austerity measures to bear down on economic activity. In turn, we expect the Bank of England to maintain its wait-and-see approach throughout the beginning of 2011, but the central bank may start to normalize monetary policy in 2011 in an effort to mitigate the risks for inflation.
The greenback weakened against its major counterparts, with the USD/JPY slipping to a low of 82.04 during the overnight session, and the dollar may face increased headwinds during the North American trade as equity futures foreshadows a higher open for the U.S. market. As the economic docket remains fairly light for Wednesday, we are likely to see investor sentiment dictate price action across the financial market, and the rise in risk appetite could generate additional U.S. dollar weakness as market participants move into higher-yielding currencies.
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