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Euro Rallies As ECB Leaks Details Of Unlimited Bond-Buying Program

By , Currency Analyst
05 September 2012 13:10 GMT

Talking Points

  • Euro: ECB to Unveil Unlimited Bond Purchases, But No Yield Cap
  • British Pound: Maintains Upward Trend Ahead Of BoE Rate Decision
  • U.S. Dollar: Risk Trends To Dictate Price Action Amid Light Calendar

Euro: ECB to Unveil Unlimited Bond Purchases, But No Yield Cap

The Euro rallied to 1.2610 amid leaks that the European Central Bank will lay out a sterilized, unlimited bond purchasing program at the rate decision on tap for tomorrow, but there’s talk that the Governing Council will refrain from capping bond yields as they look to target short-term maturities. However, German policy maker Michael Fuchs, a deputy parliamentary leader of the Christian Democratic Union party, warned that the excessive bond purchases may ultimately lead to inflation, and the non-standard measure may come under increased criticism as the central bank appears to be deviating from its one and only mandate to ensure price stability.

Nevertheless, European Council President Herman Van Rompuy argued that it’s becoming increasingly difficult to implement monetary policy as ‘financial markets within the euro zone are becoming increasingly fragmented,’ and we may see the Governing Council carry out its easing cycle throughout the remainder of the year as the governments operating under the fixed-exchange rate become increasingly reliant on monetary support. As the EURUSD maintains the range-bound price action carried over from the previous month, we should see the pair hold steady going into the ECB rate decision, and the meeting will certainly make or break the euro as market participants weigh the outlook for monetary policy. In turn, we will need to see a move above the 23.6% Fibonacci retracement from the 2009 low to the 2010 high around 1.2640-50 to instill a bullish outlook for the EURUSD, but the pair may threaten the upward trend carried over from the end of July should the rate decision disappoint.

British Pound: Maintains Upward Trend Ahead Of BoE Rate Decision

The British Pound advanced to 1.5933 amid the rise in risk sentiment, and the sterling may track higher over the near-term as the Bank of England is widely expected to maintain its current policy in September. As the BoE reverts back to a wait-and-see approach, the shift in the policy outlook should continue to prop up the sterling, but the rate decision may turn out to be a non-event should the central bank refrain from releasing an updated statement. Nevertheless, we will maintain a bullish outlook for the GBPUSD as the ascending channel from July continues to take shape, and it seems as though the BoE is slowly moving away from its easing cycle as the Funding for Lending program is anticipated to boost private sector activity.

U.S. Dollar: Risk Trends To Dictate Price Action Amid Light Calendar

The greenback is struggling to hold its ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the overnight advance to 10,046, and the reserve currency may continue to consolidate over the next 24-hours of trading amid hopes of seeing a major development at the ECB rate decision on tap for tomorrow. As the economic docket remains fairly light ahead of the central bank meetings, we should see market sentiment continue to dictate price action across the major currencies, but the rise in risk-taking behavior may taper off ahead of the highly anticipated Non-Farm Payrolls report as job growth is expected to slow in August.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:45

9:45

ISM New York (AUG)

55.2

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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05 September 2012 13:10 GMT