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Big European FX Moves That Are Just a Headline Away

Kathy Lien

EURUSD is trading near its 2013 highs just days before the US debt deadline, while GBPUSD may put in a near-term bottom if this week’s UK economic data supports the pair’s recent consolidation.

The euro (EUR) extended its gains against the US dollar (USD) on Monday following stronger Eurozone data and prevailing selling of the greenback. Industrial production in the Eurozone grew 1.0% in the month of August, erasing the prior month's decline.

With German, Italian, and French data all having been released before the Eurozone report, economists had already been looking for a strong report, but not only was the increase more than expected, but the July figures were also revised higher.

EURUSD is currently trading near its year-to-date highs, although we don't expect a breakout move in the pair unless the debt ceiling deadline cannot be averted and the US defaults on its debt.

As International Monetary Fund (IMF) head Christine Lagarde warns, America's lawmakers risk pushing the world into recession. If politics get in the way of raising the debt ceiling, the US won't be the only country that suffers. Lagarde fears that it could cause a "massive disruption the world over." The head of the World Bank also believes that "Inaction could result in interest rates rising, confidence falling, and growth slowing."

The German ZEW survey is scheduled for release on Tuesday, and given the risk that the US fiscal debt crisis poses to the markets, we would not be surprised if investor confidence deteriorated in the month of October.

As long as the problems in the US remain unresolved, we expect the European Central Bank (ECB) to remain dovish, and just like in the US, a number of policymakers are scheduled to speak this week and have no reason to be optimistic.

Plenty of UK Data on Tap for This Week

The British pound (GBP) traded higher against the US dollar and euro on Monday ahead of a busy week of market-moving UK data, which begins Tuesday morning with the latest CPI data. Consumer and producer prices will be released simultaneously, and based on a report from the British Retail Consortium (BRC), prices are expected to have fallen at a slower pace in September.

Economists are looking for CPI growth to slow, and for the annualized rate to drop from 2.7% to 2.6%. While consumer prices are running above the central bank's 2% target, it is slowly dropping from the 2.9% rate last seen in June.

Inflationary pressures are not a major concern for the Bank of England (BoE) because weak demand is limiting overall price growth. The BoE intends to keep monetary policy unchanged until 2016, and between now and then, price pressures could change dramatically. Therefore, the more important UK releases this week will be retail sales and unemployment.

Economists are looking for unemployment rolls to decline and spending to grow, but given the drop in the BRC retail sales monitor, the data could surprise to the downside, and the GBP outlook hinges on directional surprise.

This month, the currency has been hit hard by weaker PMIs and a drop in industrial production. GBPUSD is now forming a base, but in order for the consolidation to turn into a bottom, we need good data out of the UK.

By Kathy Lien of BK Asset Management

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