FX - British Pound Pares Advance as U.K. Investments Falter, Euro Holds Steady Ahead Of U.S. 2Q GDP

Talking Points

• Japanese Yen: Falls Across The Board
• Pound: Preliminary 2Q GDP Expands At Faster Pace
• Euro: German Import Prices Rise At Fastest Pace Since 2000
• U.S. Dollar: Preliminary 2Q GDP, Fed Chairman Bernanke on Tap

The preliminary 2Q GDP report showed economic activity in the U.K. expanded 1.2%from the first three-months of the year amid an initial forecast for a 1.1% rise in the growth rate, while private consumption increased 0.7%, which exceeded expectations for a 0.5% advance.

However, gross fixed capital formations unexpectedly slipped 2.4% in the second-quarter, with business investments falling 1.6%, while exports advanced 1.1%, which fell short of expectations for a 2.1% rise. As the new coalition in the U.K. tightens fiscal policy and aims to lower the budget deficit, the austerity measures may continue to drag on the recovery, and the Bank of England may look to support the real economy going into 2011 as policy makers continue to see a substantial amount of slack within the real economy. At the same time, we are likely to see MPC board member dissent against the major and push for another 25bp rate hike at the rate decision next month as price growth continues to hold above the government’s 3% limit, and the stickiness in consumer prices could lead the central bank to drop its dovish outlook for future policy as they see inflation holding above the 2% target in 2011.

The Euro was relatively unchanged during the overnight trade as price action continued to hold below the 50-Day SMA at 1.2765, but the single-currency is likely to face increased volatility throughout the day given the slew of U.S. event risks that’s lined up for Friday’s trade. However, as market liquidity thins ahead of the weekend, the major currencies could face choppy price action throughout the day, and the EUR/USD may trade within the narrow range from earlier this week as it struggles to retrace the decline from the middle of August. Nevertheless, the economic docket import prices in Germany slipped 0.2% in July versus forecasts for a 0.4% decline, while prices increased at an annualized pace of 9.9% to mark the fastest pace of growth since October 2000. As the economic recovery in the region gathers pace, the European Central Bank may see scope to normalize monetary policy further in the beginning of the following year, but the Governing Council may talk down speculation for a rate hike over the coming months as President Jean-Claude Trichet expects to see an “uneven” recovery going forward.

U.S. dollar price action was mixed overnight, with the USD/JPY paring the previous day’s decline to reach a high of 84.84, and the greenback is likely to face increased volatility going into the North American trade as the economic docket is expected to reinforce a weakened outlook for future growth. The preliminary 2Q GDP reading for the world’s largest economy is anticipated to show a sharp downward revision, with market participants forecasting the growth rate to expand at an annualized pace of 1.4% versus an advanced ready of 2.4%, while personal consumption is projected to increase 1.6% from the first three-months of the year. At the same time, Fed Chairman Ben Bernanke is scheduled to speak at 14:00 GMT in Jackson Hole, Wyoming regarding the economic outlook for the U.S., and comments from the central bank head is likely to move the currency market as investors weigh the prospects for future policy.

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

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