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The Euro extended the rally from earlier this week and rose to a high of 1.3663 during the overnight trade as investors raised their appetite for risk, while German Finance Ministry spokesman Michael Offer talked down speculation that Greece will need funds beyond the EUR 45B bailout package from the EU and the IMF.

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: Maintains Narrow Range
•    Euro: Industrial Outputs Jump in February
•    U.S. Dollar: Retail Sales, CPI, Chairman Bernanke on Tap

U.S. Dollar Price Action Mixed Ahead of Heavy Event Risk, Fed Chairman Bernanke Testimony

Moreover, Mr. Offer went onto say that Greece “doesn’t look like” it will need aid for the time being, but noted that the German Parliament would probably have to vote on the bailout package before the funds become available.

At the same time, the EU said that Portugal’s initiatives are “ambitious” and argued that nation will need to take further steps in 2010 to bring its public finances back in-line with the stability pact, and saw a risk for the deficit to reach around 90% of GDP by 2013. Meanwhile, industrial outputs in the Euro-Zone jumped 0.9% in February to top expectations for a 0.1% rise, with the annualized rate surging 4.1% from the previous year to mark the fastest pace of growth since April 2008, and businesses may continue to increase their rate of production over the coming months as the economic recovery gathers momentum. However, as the economies operating under the fixed-exchange rate system struggle to address the imbalances in the budget, the European Central Bank is likely to maintain a loose policy stance going into the second-half of the year in an effort to encourage a sustainable recovery.

The British Pound tipped higher for the second-day to reach a high of 1.5452 against the greenback, but the lack of momentum to test the weekly high at 1.5484 may keep the exchange rate within a narrow range over the remainder of the week as investors weigh the outlook for future policy. Nevertheless, the Bank of England is scheduled to release the minutes from the April rate decision next Wednesday at 8:30 GMT, and the central bank is likely to maintain a dovish tone as Governor Mervyn King expects inflation to fall back below the 2% target later this year. However, a shift in the economic outlook is likely to stoke increase volatility in the exchange rate as policy makers see a risk for another quarterly contraction in GDP, and fears of a protracted recovery may lead the MPC to hold the benchmark interest rate at 0.50% and maintain the option to expand its asset purchases further in order to balance the risks for the economy.

U.S. dollar price action was mixed overnight, with the USD/JPY paring the previous day’s decline to reach a high of 93.62, and the greenback is likely to face increased volatility going into the North American session as the economic docket is expected to reinforce an improved outlook for growth and inflation. Retail spending in the world’s largest economy is expected to rise 1.2% in March following the 0.3% expansion in the previous month, while consumer prices are forecasted to rise at an annual pace of 2.4% for the same period after advancing 2.1% in February. In addition, business inventories are projected to rise 0.4% in February after holding flat during the previous month, while Fed Chairman Bernanke is scheduled to testify in front of the Joint Economic Committee of Congress at 14:00GMT, and comments from the central bank head could stoke a shift in market sentiment as the FOMC pledges to hold borrowing costs at the record-low for an “extended period” of time.

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Forex Weekly Trading Forecast – 04.12.10

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