Forex: U.S. Dollar Gives Back, Euro Struggles to Hold Ground As S&P Cuts Credit Rating For Greece

The U.S. dollar lost ground during the overnight trade as currency traders increased their appetite for yields, and the rebound in risk sentiment is likely to drive price action throughout the North American as the economic docket remains fairly light for Monday.

Talking Points

• British Pound: Weighed By Slowing Recovery
• Euro: S&P Cuts Greece's Rating To B From BB-
• U.S. Dollar: Risk To Drive Price Action On Bare Calendar

The U.S. dollar lost ground during the overnight trade as currency traders increased their appetite for yields, and the rebound in risk sentiment is likely to drive price action throughout the North American as the economic docket remains fairly light for Monday. However, the EUR/USD pared the overnight rally to 1.4441 and the single-currency may face additional headwinds over the near-term as European policy struggle to address the risk for contagion.

During the unscheduled meeting on May 6, the EU pledged to review the lending terms of the EUR 110B bailout for Greece in order to avoid the region's first sovereign debt restructuring, but the record-high financing costs faced by the European periphery will continue to bear down on market sentiment as investors fear the a breakup of the monetary union. In turn, the small correction in the single-currency could be short-lived, and the EUR/USD may continue to push lower over the near-term as it breaks out of the upward trend from earlier this year. As the euro-dollar struggles to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4430-50, the overnight rally may taper off going into the North American trade, but speculation for higher borrowing costs may help to prop out the single-currency as the European Central Bank sticks to its one and only mandate to ensure price stability. Despite the ongoing turmoil within Europe's financial system, market participants still see the ECB raising the benchmark interest rate by 75bp over the next 12-months according to Credit Suisse overnight index swaps, and the EUR/USD may face range-bound price action in the coming days as investors weigh the prospects for future policy.

The British Pound struggled to hold its ground as home prices in the U.K. marked the biggest decline in seven-months, and the GBP/USD may threaten the upward trend from earlier this year as we are likely to see the Bank of England maintain a dovish outlook in its quarterly inflation report, which is due out on May 11. As growth and inflation cools, BoE Governor Mervyn King should retain a neutral tone for future policy, and the central bank head may talk down speculation for higher borrowing in the U.K. as he aims to encourage a sustainable recovery. As the GBP/USD approaches the 50-Day SMA at 1.6286, we may see the near-term reversal in the exchange rate gather pace later this week, and the sterling may face additional selling pressures over the near-term as the DailyFX Speculative Sentiment Index now highlights a bearish outlook for the pair. The contrarian indicator suggests we will see additional declines in the exchange rate as retail traders are now net long against the GBP/USD, and comment from the BoE will certainly dictate future price action for the pair as investors weigh the outlook for monetary policy.

As equity futures foreshadow a higher open for the U.S. market, the rebound in risk appetite should carry into the North American trade, and the U.S. dollar may lose ground throughout the day as investors move into higher-yielding currencies. However, as Standard and Poor's lowers Greece's sovereign credit rating to B from BB- and warns of additional cuts on the horizon, heightening fears surrounding the European debt crisis could spur a shift in risk sentiment as investor confidence remains battered.

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Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
CAD	12:15	08:15	Housing Starts APR	184.0K	185.1K

Currency	GMT	Release	Expected	Actual	Comments
GBP	23:00	Lloyds Employment Confidence (APR)	--	-58	Best since Sept. ‘09
AUD	01:30	NAB Business Conditions (APR)	--	5	Continues weakening trend
AUD	01:30	NAB Business Confidence (APR)	--	7
AUD	01:30	ANZ Job Advertisements (MoM) (APR)	--	1.0%	Slips back to weakest in 6-months
EUR	06:00	German Exports (MoM) (MAR)	1.1%	7.3%	Gathers pace after contracting in Jan.
EUR	06:00	German Imports (MoM) (MAR)	0.8%	3.1%	3 straight expansion
EUR	06:00	German Trade Balance (MAR)	11.8B	18.9B	Highest surplus since June ‘08
EUR	06:00	German Current Account (MAR)	13.3B	19.5B
GBP	07:00	Halifax House Prices (3MoY) (APR)	-3.0%	-3.7%	6th consecutive contraction
GBP	07:00	Halifax House Prices (MoM) (APR)	0.1%	-1.4%	2nd contraction in last 3
EUR	08:30	Euro-Zone Sentix Investor Confidence (MAY)	13.8	10.9	Hits 4-month low