Forex: Euro Lags Behind Ahead of U.S. NFPs- Further Weakness Ahead

DailyFX

Talking Points

  • Euro: German Unemployment Beats Forecast, Retail Sales Slumps
  • British Pound: BoE Speaks Out Against Growth Target for Monetary Policy
  • U.S. Dollar: Personal Spending Slows, Incomes Jump- NFPs in Focus

Euro: German Unemployment Beats Forecast, Retail Sales Slumps

The Euro struggled to maintain the overnight advance to 1.3582 even as unemployment in Germany unexpectedly fell 16K in January, and the single currency remains poised to face additional headwinds over the near to medium-term as the fundamental outlook for Europe remains tilted to the downside.

Despite the better-than-expected labor report out of Europe’s largest economy, a separate report showed a 1.7% drop in retail spending during December, while borrowing amongst Irish households slipped another 3.9% after falling 3.6% in November.

Meanwhile, Bundesbank President Jens Weidmann warned ‘the consequences of unsound policies will be too easily passed on to others’ as European policy makers continue to shore up more money to avert a euro-area breakup, and argued that the EU ‘requires discipline in cleaning up government finances’ as the countries operating under the monetary union become increasingly reliant on external support.As European policy makers struggle to address record-high unemployment in the euro-area, the slump in household consumption along with weakening demands for private credit may prolong the recession, and we should see the European Central Bank (ECB) continue to carry out its easing cycle in 2013 as the economic downturn threatens price stability.

As the EURUSD trades within the previous day’s range, the pair should hold steady ahead of the highly anticipated U.S. Non-Farm Payrolls report, but the euro-dollar remains poised for a near-term correction as the relative strength index appears to be capped by the 73 figure. Nevertheless, we will wait for the oscillator to fallback from overbought territory to see a more meaningful move to the downside, but we may see the pair mark a fresh high going into February should NFPs fuel speculation for more Fed easing.

British Pound: BoE Speaks Out Against Growth Target for Monetary Policy

The British Pound continued to gain ground on Thursday, with the GBPUSD climbing to a fresh weekly high of 1.5841, and the sterling looks poised to retrace the sharp decline from earlier this month as the Bank of England (BoE) continues to scale back its willingness to move away from its inflation-targeting agenda.

Indeed, BoE board member Martin Weale spoke out against adopting a growth target for monetary policy as the costs outweigh the benefits, and we may see a growing number of central bank officials strike a more hawkish tone in 2013 inflation is expected to hold above the 2% target over the policy horizon.

As the BoE sees the Funding for Lending scheme working its way through the real economy, the Monetary Policy Committee is well positioned to bring its easing cycle to an end in 2013, and the central bank may shift gears later this year as the economic recovery is expected to pick up over the coming months.

As the GBPUSD comes off of trendline support, we should see the pair continue to retrace the decline from earlier this month, and we will maintain our bullish forecast for the British Pound as the exchange rate maintains the upward trend since the 2009 lows.

U.S. Dollar: Personal Spending Slows, Incomes Jump- NFPs in Focus

The greenback struggled to hold its ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,140, but the weakness may be short-lived as the fundamental outlook for the world’s largest economy improves.

Although U.S. personal spending expanded less-than-expected in December, personal incomes jumped 2.6% in December to mark the biggest advance since 2004, and the recent data coming out of the world’s largest economy instills an improved outlook for private consumption, which remains one of the leading drivers of growth.

As the economic recovery gradually gathers pace, we should see the Fed adopt a more hawkish tone in the coming months, and we may see the central bank slowly move away from its easing cycle as the region gets on a more sustainable path.

Nevertheless, as market participants turn their attention to the NFPs on tap for Friday, the dollar should hold steady going into the end of the week, but we may see the reserve currency track higher in the month ahead as the labor market is expected to add another 165K jobs in January.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

9:00

NAPM-Milwaukee (JAN)

52

52

USD

14:45

9:45

Chicago Purchasing Manager (JAN)

50.5

51.6

NZD

21:45

16:45

Net Migration SA (DEC)

590

AUD

22:30

17:30

AiG Performance of Mfg Index (JAN)

44.3

AUD

23:00

18:00

RPData-Rismark House PX Actual (JAN)

-0.3%

--- 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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