Forex: U.S. Dollar Weakness Persists, British Pound At Risk For Reversal

By David Song, Currency Analyst
19 January 2011 13:30 GMT
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Talking Points

* Japanese Yen: Mixed Against Majors
* British Pound: Jobless Claims Weaken For Third Month
* Euro: Portugal Sells EUR 750B in 12-Month Bills
* U.S. Dollar: Housing Starts Slump, Building Permits Surge Higher

The U.S. dollar continued to lose ground against its major counterparts on Wednesday, and the greenback may continue to push lower during the North American trade as the economic docket reinforces a weakened outlook for future growth. The EUR/USD extended the advance from earlier this week to reach a fresh monthly high of 1.3524, but we may see a corrective retracement unfold over the next 24 hours of trading as price action struggles to hold above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500. In turn, the euro-dollar may consolidate going into the end of the week, and the pair may trend sideways ahead of the EU Summit in February as investors weigh the prospects for future policy.

Nevertheless, Portugal auctioned EUR 750B in 12-month bills yielding 4.029%, which compares with the 5.281% offered back in December, and the drop in borrowing costs should help to curb the risk for contagion as European policy makers take unprecedented steps to manage their public finances. However, as the region faces an uneven recovery, the uncertainties surrounding the economic outlook may continue to bear down on the exchange, and the European Central Bank could be forced to delay its exit strategy further as it aims to encourage a sustainable recovery. As European policy makers maintain a lackadaisical approach in addressing the sovereign debt crisis, the euro remains at risk of facing additional headwinds over the coming months,

The British Pound advanced to a high of 1.6036 as the economic docket reinforced an improved outlook for the U.K. economy, and the exchange rate may continue to push higher over the near-term as the recovery gathers pace. Claims for unemployment benefits unexpectedly slipped 4.1K in December amid forecasts for a flat reading, while the claimant count rate held at 4.5% for the seventh consecutive month. As growth and inflation accelerates, the British Pound may continue to retrace the decline from back in November, and the Bank of England may see scope to start normalizing monetary policy later this year as interest rate expectations gather pace. However, the recent rally may taper off over the coming days as the relative strength index approaches overbought territory, and we should see a small reversal in the exchange rate as long as the RSI holds below 70.

As market participants diversify away from the greenback, the U.S. dollar may continue to selloff going into the North American trade, and the recent weakness underlying the reserve currency may carry into February as the fundamental outlook remains clouded with uncertainty. Housing starts in the world’s largest economy slipped 4.3% in December to an annualized pace of 529K amid forecasts for a 0.9% decline, while building permits jumped 16.7% to 635K to mark the biggest advance since June 2008. As the region copes with a depressed housing market, the Fed is widely expected to support the real economy over the medium-term, and the central bank may see scope to expand monetary policy further as growth and inflation remains subdued.