Euro Outlook Weighed By Deepening Recession- Fitch Strikes Down Pound

DailyFX

Talking Points

  • Euro: Jobless Rate Hits Record-High, ECB Overstepping Mandate
  • British Pound: Fitch Continues To Fire Warning Shots, Larger Correction Underway
  • U.S. Dollar: ISM Manufacturing, Construction Spending On Tap- All Eyes On Bernanke

Euro: Jobless Rate Hits Record-High, ECB Overstepping Mandate

Although the EURUSD bounced back from an overnight low of 1.2802, the economic docket continued to instill a weakening outlook for the euro-area as the jobless rate climbed to a record high of 11.4% in August.

As the debt crisis continues to raise the threat for a prolonged recession, European Central Bank board member Joerg Asmussen warned ‘there could be additional need for external financing’ in Greece, while there’s talk that the periphery country may receive a portion of its next bailout payment as the region continues to request more time in meeting its budget target.

As the governments operating under the single currency become increasingly reliant on monetary support, former ECB board members Juergen Stark and Otmar Issing argued that the unlimited bond purchasing program goes beyond the mandate to ensure price stability, and the Governing Council may come under increased scrutiny as President Mario Draghi puts the central bank’s credibility on the line to buy more time.

Indeed, the negative headlines coming out of Europe instills a weakening outlook for the region as policy makers struggle to restore investor confidence, and the rebound off of trendline support is likely to be short-lived as the EU maintains a reactionary approach in addressing the debt crisis. In turn, we should see the EURUSD come under additional pressure over the coming days, and we will be keeping a close eye on the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the pair searches for support.

British Pound: Fitch Continues To Fire Warning Shots, Larger Correction Underway

The British Pound slipped to 1.6107 as manufacturing in the U.K. contracted more-than-expected to September, while private sector credit in Britain remained stagnant as mortgage approvals increased an annualized 47.7K in August amid forecasts for a 49.2K print.

Meanwhile, Fitch continued to fire warning shots against the U.K., with the rating agency warning that the government is now ‘standing still in terms of deficit reduction,’ and the growing threat for a credit-rating downgrade may continue to dampen the appeal of the sterling as the fundamental outlook for the region remains clouded with high uncertainty.

As the GBPUSD carves out a near-term top coming into October, the pullback from 1.6308 should turn into a larger correction, and we may see the pound-dollar threaten the ascending channel from earlier this year as the relative strength index fails to maintain the bullish trend carried over from June.

U.S. Dollar: ISM Manufacturing, Construction Spending On Tap- All Eyes On Bernanke

The greenback is struggling to hold its ground ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the advance to 9,891, but we may see the reserve currency regain its footing as the economic docket is expected to reinforce an improved outlook for growth.

Indeed, the ISM Manufacturing report is anticipated to show an expansion in business outputs, while building activity is projected to rebound in August as the recovery gradually gathers pace. However, as Fed Chairman Ben Bernanke is scheduled to speak on monetary policy later today, market participants may show a muted reaction to the data, and the fresh batch of central bank rhetoric may set the tone for the first trading week of October as market participants weigh the prospects for future policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

ISM Manufacturing (SEP)

50.0

49.6

USD

14:00

10:00

ISM Prices Paid (SEP)

55.5

54.0

USD

14:00

10:00

Construction Spending (MoM) (AUG)

0.5%

-0.9%

USD

16:00

12:00

Fed's John Williams Speaks on U.S. Economy

EUR

16:00

12:00

Italian New Car Registrations (YoY) (SEP)

-20.23%

USD

16:30

12:30

Fed Chairman Ben Bernanke Speaks on Monetary Policy

EUR

16:30

12:30

ECB's Asmussen, Nowotny Speak on Euro Economy

EUR

17:00

13:00

Italian Budget Balance (euros) (SEP)

-6.0B

EUR

17:00

13:00

Italian Budget Balance (euros) (YTD) (SEP)

-33.5B

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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