Forex: U.S. Dollar Pares Decline From Holiday Trade Despite Rebound In Risk

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2011/01/03/01-03-11.html

Talking Points

• Japanese Yen: Loses Ground Against Most Counterparts
• British Pound: Maintains Downward Trend
• Euro: China To Increase Purchases of Spanish Debt
• U.S. Dollar: ISM Manufacturing, Construction Spending on Tap

The U.S. dollar bounced back against most of its major counterparts during the first trading session of 2011, and the greenback may continue to appreciate going into the North American trade as the economic docket is expected to reinforce an improved outlook for future growth. However, as the EUR/USD bounces back from a low of 1.3249, the exchange rate looks as though it will hold above the 20-Day moving average (1.3223) throughout the day, and the rise in risk appetite could bear down in the reserve currency as market sentiment continues to drive price action for the major currencies. As investors in the U.K. and Canada remain offline in observance of New Years day, the foreign exchange market could face choppy price action over the next 12 hours of trading, and the majors may hold their daily range as market liquidity remains fairly thin.

Nevertheless, China’s Vice Premier Li Keqiang pledged to increase its purchases of Spanish debt as he remains confident in Spain’s ability to tackle its budget deficit, but the ongoing weakness underlying the European financial system may continue to bear down on the exchange rate as policy makers struggle to restore investor confidence. In turn, we expect the single-currency to face headwinds throughout the beginning of the New Year, and the European Central Bank may continue to delay its exit strategy as it aims to balance the risks for the region. With Estonia joining the euro-block in 2011, the ECB ability to manage monetary policy may become increasingly difficult as the economic recovery cool, and the central bank may maintain its wait-and-see approach throughout the first-quarter of 2011 as policy makers expect inflation to remain subdued over the medium-term.

The British Pound fell to a low of 1.5446 during the European trade, but the lack of momentum to pare Friday’s advance may keep the exchange rate within its current range as market participation remains relatively thin. As the GBP/USD maintains the downward trend from the November high (1.6298), the uncertainties surrounding the economic outlook may continue to weigh on the exchange rate, and the pair may face increased headwinds over the near-term as market participants anticipate the tough austerity measures in the U.K. to bear down on the recovery. However, as the Bank of England projects inflation to hold above the 2% target throughout 2011, the central bank may adopt a highly hawkish outlook for future policy given the stickiness in price growth, and the pound-dollar may break out of the downward trend over the coming days as it carves out a bottom around 1.5350.

The greenback rallied against most of its major counterparts on Monday, with the USD/JPY advancing to a high of 81.45, and the U.S. dollar may continue to pare the sharp decline from the previous week as the economic docket is expected to reinforce an improved outlook for future growth. Manufacturing in the world’s largest economy is expected to expand at a faster pace in December, with market participants forecasting the ISM index to advance to 57.0 from 56.6 in the previous month, while construction spending is projected to increase another 0.2% in November after climbing 0.7% in the month prior. As the economic recovery in the U.S. gradually gathers pace, the Fed may revise its fundamental outlook for 2011, and the central bank may see scope to start normalizing monetary policy later this year as the prospects for growth and inflation improves.

Will the recent rally in the EUR/USD hold in 2011? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 01.03.11

To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

FX Upcoming

Currency	GMT	EST	Release		Expected	Prior
USd	15:00	10:00	ISM Manufacturing (DEC)		57.0	56.6
USD	15:00	10:00	ISM prices Paid (DEC)		71.3	69.5
USD	15:00	10:00	Construction Spending (MOM) (NOV)		0.2%	0.7%

Currency	GMT	Release	Expected	Actual	Comments
CNY	01:00	Non-Manufacturing PMI (DEC)	--	56.5	Bounces back from 9-month low in Nov.
CHF	08:30	SVME-PMI (DEC)	62.0	59.6	Slips back from 4-month high
EUR	08:45	Italian PMI Manufacturing (DEC)	52.2	54.7	Hits 2010 high
EUR	08:50	French PMI Manufacturing (DEC)	56.3	57.2	Slips back after hitting high in Nov.
EUR	08:55	German PMI Manufacturing (DEC)	60.9	60.7	Best since April.
Eur	09:00	Euro-zone PMI Manufacturing (DEC)	56.8	57.1

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