Japanese Yen: Remains Weighed By Risk Appetite British Pound: Service-Based Activity Cools Euro: Retail Sales Tops Forecast U.S. Dollar: Non-Farm Payrolls, ISM Non-Manufacturing on Tap The U.S. dollar continued to lose ground against its major counterparts during the European trade, with the EUR/USD advancing to a high of 1.3268, and the slew of event risk scheduled for Friday is likely to spark increased volatility in the currency market as investors weigh the outlook for future growth. As the EUR/USD pares the decline from earlier this week, the sharp rebound in the exchange rate could lead the pair to work its way back towards the 100-Day SMA (1.3327) during the North American trade, but the near-term rally could be short-lived as fears surrounding the European debt crisis continues to drag on market sentiment. European Commissioner for Economic and Monetary Affairs Olli Rehn said that the pace of improvement in the budget deficit is “not enough” to stimulate a sustainable recovery, and pushed for increased reforms during a speech in Brussels as the governments operating under the fixed-exchange rate system struggle to manage their public finances. As a result, Mr. Rehn pledged to do “whatever it takes to safeguard” the European financial system, and policy makers may take additional steps to restore investor confidence as the risks for contagion intensifies. As the European Central Bank delays its exit strategy, the Governing Council may look to support the real economy throughout the beginning of the following year, but the central bank could face increased pressures to conduct additional monetary easing as policy makers expect to see an uneven recovery going forward. Nevertheless, the economic docket showed retail spending in the Euro-Zone increased 0.5% in October to top expectations for a 0.2% rise, while service-based activity increased at a faster pace during the same period, with the PMI reading advancing to 55.4 from 53.3 in October. As growth and inflation improves, the ECB may drop its dovish tone in 2011, and speculation surrounding the prospects for future policy is likely to play an increased role in driving price action for the single-currency as the central bank preserves its wait-and-see approach. The British Pound continued to maintain the narrow range from earlier this week, with the GBP/USD falling back from a high of 1.5681, and the pair may hold steady going into the following week as price action trades below the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700. With the Bank of England scheduled to announce its interest rate decision next week, the pound-dollar could face increased volatility in the days ahead as market participants expect to see another three-way split within the MPC, but the central bank may refrain from releasing a policy statement as they maintain a neutral policy stance. Nevertheless, service-based activity in the U.K. unexpectedly expanded at a slower pace in November, with the PMI falling back to 53.0 in November from 53.2 in the previous month, and the ongoing slack within the real economy could lead the BoE to support the real economy throughout the beginning of 2011 as it aims to balance the risks for the region. However, as policy makers expect price growth to hold above target throughout the following year, the central bank may see scope to start normalizing monetary policy over the coming months, and a rise in interest rate expectations could lead the GBP/USD retrace the decline from November as investors weigh the outlook for future policy. The greenback weakened across the board, with the USD/JPY slipping to a low of 83.46, and the reserve currency is likely to face increased volatility going into the end of the week as the economic docket is expected show employment in the U.S. increasing for the second consecutive month in November. Non-farm payrolls are forecasted to increase 150K after expanding 151K in October, while the annual rate of unemployment is projected to hold steady at 9.6% for the fourth consecutive month. In addition, service-based activity in the world’s largest economy is expected to expand at a faster pace during the same period, with market participants forecasting the ISM index to increase to 54.8 from 54.3, while factory orders are anticipated to contract 1.2% in October after expanding 2.1% in the month prior. As the Fed maintains a cautious tone for the U.S., the rise in employment could encourage an improved outlook for economy as private sector spending remains one of the leading drivers of growth, but there could be mixed reactions to the slew of U.S. data as risk trends continue to dictate price action in the foreign exchange market. Will the EUR/USD Retrace The Advance From September As European Debt Woes Intensify? Join us in the Forum Related Articles: Forex Weekly Trading Forecast – 11.29.10 To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com FX Upcoming Content provided by DailyFX

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