Outside of the excitement in the British pound, which soared then retraced after a solid employment report, it has been a very quiet morning in the foreign exchange market. Currencies, equities and commodities had little reaction to last night’s speech from President Obama and with no major U.S. data scheduled for release for the third straight day, it should be a quiet trading session barring any surprise developments on the Syrian conflict. September has been a month of breakout moves in currencies like the GBP/USD, USD/JPY and AUD/USD but the follow through has been weak. This lack of extension highlights the level of hesitancy in the market as investors eye the recovery in currencies and equities with caution. There are clear signs of stabilization in China but the outlook for the U.S. and Europe are dimmer.

EUR/USD – Stocks have rallied because the Federal Reserve is poised to taper only symbolically or could delay a move to December, but their motivation is an unimpressive U.S. recovery. At the same time, weak economic data from Germany and France could be followed by lower growth expectations. According to Les Echos, a daily French financial newspaper, the government plans to cut its 2014 growth forecast from 1.2% to 0.9% and leave their 2013 forecast unchanged at 0.1%. At the same time, the ECB is saying that Greece will need another aid package. The Berlusconi political wildcard also poses an ongoing risk for the currency and in the latest developments the Senate Subcommittee has delayed its vote to Thursday. The difficulty of this decision means that more delays are possible. However the EUR/USD may not be affected in a meaningful way because the risk of holding dollars offset the risk of holding euros. While no major surprises are expected in Thursday’s jobless claims report, Friday’s U.S. retail sales numbers are not expected to be satisfactory enough for FX traders, leaving the EUR/USD to trade in its existing range.

EUR/GBP - So instead, we are looking for euro weakness against the GBP and the NZD. This morning’s U.K. unemployment report was strong with jobless claims falling more than expected and the unemployment rate dropping from 7.8% to 7.7%. Persistent improvements in the U.K. economy will make it difficult for Bank of England Governor Mark Carney to convince investors that the outlook for the U.K. is grim. 84 cents is a very important support level for EUR/GBP that we expect to be broken in the medium term with a potential move down to 82 cents for the pair. If Carney remains dovish, we would view that as an opportunity to sell EUR/GBP at a higher level.

EUR/NZD – The most exciting event risk today is the Reserve Bank of New Zealand’s rate decision. While the central bank is not expected to change interest rates, a strengthening local economy, improving outlook for Australia and China and lending restrictions that could cool the housing market could prompt some optimism. The only area of concern is the level of the currency but the NZD is off its highs against the AUD. As a result, we are looking for further strength in the New Zealand dollar that should eventually drive EUR/NZD towards 1.60. Of course, we could be completely wrong and RBNZ Governor Wheeler decides to remain cautious, at which point the currency pair could rally before heading lower over the longer term.

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