http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2010/12/31/12-31-10.html
Talking Points
- Japanese Yen: Mixed During Holiday Trade
- British Pound: Home Prices Rise For First Time Since May
- Euro: To Hold Below 1.3500
- U.S. Dollar:Weakness To Be Short-Lived, Reversal On Horizon
The U.S. dollar continued to sell off during the last trading day of 2010, and the greenback may continue to lose ground going into the North American trade as investors diversify away from the reserve currency. The EUR/USD worked its way back above the 100-Day moving average (1.3369) during the overnight trade to reach a fresh weekly high of 1.3388, but thin market conditions are likely to produce choppy price action as investors go offline ahead of the New Year. As European policy makers struggle to restore investor confidence, the recent weakness in the greenback is likely to be short-lived, and we expect to see a sharp reversal going into 2011 as the risk for contagion continues to weigh on the economic outlook for the euro-area.
In turn, the European Central Bank is widely expected to support the real economy throughout the first-half of the following year, and the Governing Council may show an increased willingness to expand monetary policy further as the tough austerity measures bear down on the economic recovery. According to Credit Suisse overnight index swaps, investors are pricing at least one 25bp rate hike for 2011, but the ECB may refrain from normalizing monetary policy as the rebound in economic activity tapers off. As European policy makers expect price growth to remain subdued over the following year, dovish comments from the Governing Council is likely to drag on interest rate expectations, and the Euro could face increased headwinds over the medium-term as the governments operating under the fixed-exchange rate system struggle to manage their public finances. As a result, the EUR/USD should continue to hold below the 50.0% Fibonacci retracement fromthe 2009 high to the 2010 low around 1.3500 in January, and the exchange rate looks poised to extend the decline from back in November as the fundamental outlook for the Euro-Zone remains bleak.
The British Pound bounced back on Friday to reach a high of 1.5544, and the exchange rate may continue to push higher over the near-term as price action crosses back above former support around 1.5500. As the GBP/USD carves out a bottom during the final week of December, the exchange rate should continue to retrace the decline from earlier this month, and the pound-dollar may push higher over in January as the economic docket reinforces an improved outlook for the U.K. A report by Nationwide showed home prices in Britain unexpectedly increased 0.4% in December to mark the first advance since May, and conditions are likely to improve further as policy makers expect the economic recovery to gradually gather pace in 2011. In turn, the Bank of England may see scope to start normalizing monetary policy over the following year, and the central bank may look to raise borrowing costs in the medium-term as they anticipate inflation to hold above target until 2012.
The greenback weakened against all of its major counterparts, with the USD/JPY slipping to a fresh monthly low of 81.25, and the dollar is likely to face choppy price action going into the end of the year as market liquidity fades ahead of 2011. The lack of event risks scheduled for Friday could exacerbate the recent weakness underlying the greenback as investors diversify away from the reserve currency, but we expect to see a correction pan out over the following week as market participation returns to full swing. However, the cautious tone held by the Federal Reserve may dampen demands for the greenback as the central bank casts doubts for a sustainable recovery, and the FOMC may look to conduct additional monetary easing in the following year as it aims to stem the downside risks for growth and inflation.
Related Articles: Forex Weekly Trading Forecast - 12.27.2010
FX Upcoming
| Currency | GMT | EST | Release | Expected | Prior | ||
| No Scheduled Releases | |||||||
| Currency | GMT | Release | Expected | Actual | Comments |
| AUD | 00:30 | Private Sector Credit (MoM) (NOV) | 0.2% | 0.3% | Best since July |
| AUD | 00:30 | Private Sector Credit (YoY) (DEC) | 3.4% | 3.6% | Fastest pace in 2010 |
| CNY | 01:35 | MNI Business Condition Survey (DEC) | -- | 62.08 | |
| GBP | 07:00 | Nationwide House Prices (YoY) (DEC) | -0.3% | 0.4% | Remains at lowest level in 2010 |
| GBP | 07:00 | Nationwide House Prices (MoM) (DEC) | -0.2% | 0.4% | 1st expansion in last 3 |
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