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Forex: Euro Rallies On Hopes Surrounding EU Summit, Greek Aid Package

By , Currency Analyst
22 November 2012 14:30 GMT

Talking Points

  • Euro: EU Budget Summit Takes Center Stage, Greek Aid Package On Horizon
  • British Pound: BoE Warns of 4Q Contraction, Inflation To Hold Above Target
  • U.S. Dollar: Struggles During Holiday Trade, Outlook Remains Bullish

Euro: EU Budget Summit Takes Center Stage, Greek Aid Package On Horizon

The Euro rallied to 1.2897 amid hopes surrounding the EU Budget Summit in Brussels, but the conference may fail to encourage an improved outlook for the monetary union as the governments operating under the single currency continue act in their own interest.

Although Euro Group President Jean-Claude Juncker remains hopeful in finding a near-term solution for Greece, Luxembourg’s Prime Minister said there’s limited scope of seeing a major development coming out of the budget meeting as the group struggles to meet on common ground. In turn, Mr. Juncker warned that the EU may fail to reach an agreement on the seven-year budget plan, but went onto say that ‘further cuts that go beyond the total of 75 billion euros are not possible because then the work of the European Union in a lot of areas will be at serious risk.’

As European policy makers increase their pledge to address the risks surrounding the region, there’s growing speculation that the EU will announce a bundled aid package for Greece in the week ahead, but the additional efforts to keep the periphery country within the monetary union will only help to buy more time as the debt crisis continues to drag on the real economy.

As the relative strength index on the EURUSD breaks out of the downward trend carried over from back in September, the relief rally in the euro-dollar may gather pace going into the end of November, but we will maintain our bearish forecast over the near to medium-term as the fundamental outlook for the region turns increasingly bleak.

British Pound: BoE Warns of 4Q Contraction, Inflation To Hold Above Target

The British Pound halted the five-day rally, with the GBPUSD giving back the overnight advance to 1.5977, and the sterling may continue to consolidate over the remainder of the week as the Bank of England (BoE) keeps the door open to expand its balance sheet further.

BoE board member Martin Weale said he would favor more quantitative easing as ‘there is a significant risk of a contraction in the fourth quarter,’ but went onto say that he’s ‘comfortable’ with the current policy stance as the central bank sees inflation holding above the 2% target over the next two years.

As the Monetary Policy Committee continues to soften its dovish tone for monetary policy, the shift in central bank rhetoric should prop up the sterling over the near to medium-term, and the short-term pullback in the exchange rate may provide a buying opportunity for currency traders as the GBPUSD appears to be carving out a higher low in November.

The GBPUSD looks poised to push higher in the coming days as the relatives strength index on the pound-dollar breaks out of the bearish trend from September, and we may see the sterling appreciate further ahead of the end of the year as the BoE looks to carry its wait-and-see approach into 2013.

U.S. Dollar: Struggles During Holiday Trade, Outlook Remains Bullish

The greenback struggled to hold its ground going into the holiday trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,028, but we may see the reserve currency face choppy price action over the next 24-hours of trading as the U.S. goes offline for the Thanksgiving holiday.

As market participation thins, we may see the USDOLLAR maintain the range-bound price action carried over from the end of the previous week, but the near-term outlook for the index remains propped up by the upward trend in the relative strength index as the bullish trend continues to take shape. In turn, recent weakness in the greenback should be short-lived, and we are still looking for a run at the 10,100 figure as the Federal Reserve adopts an improved outlook for the world’s largest economy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

15:00

10:00

Euro-Zone Consumer Confidence (NOV A)

-25.9

-25.7

--- 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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22 November 2012 14:30 GMT