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Talking Points

  • U.S. Dollar: Mixed Ahead Of Fed Chairman Bernanke’s Speech,
  • Euro: ECB Faces Increased Reliance To Address Risks
  • British Pound: BoE To Support The Economy, Further Weakness Ahead

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) held a narrow range on Thursday, and the reserve currency may continue to consolidate during the North American trade as investors weigh the likelihood of seeing another round of quantitative easing. Indeed, market participants speculate Chairman Bernanke could hint at QE3 while speaking at the Fed symposium, but we may see the central bank head take a step back and discuss the recent decision announced by the FOMC as the majority pledges to carry the zero interest rate policy well into 2013.

Given the dissenting views amongst Fed officials, it seems as though the Fed will endorse a wait-and-see approach throughout the remainder of the year, and the lack of conviction for additional monetary stimulus should prop up the reserve currency as investors scale back their appetite for risk. In turn, we may see a flight to safety heading into the end of the week, and the dollar index should continue to recoup the losses from earlier this month as the central bank concludes its easing cycle. However, if we see Mr. Bernanke open to the door to expand its balance sheet further, expectations for additional easing is likely to spur an inverse reaction in the USD, and the recent weakness in the greenback may gather pace as investors continue to diversify away from the reserve currency.

The Euro pared the overnight advance to 1.4473 and the near-term forecast remains fairly bearish as the ongoing turmoil within the European banking system dampens the outlook for the region. As European policy makers struggle to contain the sovereign debt crisis, Bundesbank board member Andreas Dombret said the European Central Bank ‘stands ready to mitigate potential bottlenecks’ in U.S. dollar funding, and there seems to be an increased reliance on the ECB to address the risks for the region as the EU reverts back to a more reactionary approach in dealing with the debt crisis. In turn, we should see ECB President Jean-Claude Trichet continue to soften his hawkish outlook for monetary policy, and the bearish pattern in the EUR/USD may continue to pan out in the days ahead as the fundamental outlook for the region deteriorates. As the euro-dollar struggled to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, the pay may give back the advance from earlier this month, and the single-currency remains poised to face additional headwinds over the near-term as the region faces a heightening risk for contagion.

The British Pound extended the decline from the previous day to reach a low of 1.6331 and the sterling may continue to give back the near-term advance as the Bank of England maintains a cautious tone for the region. BoE board member Martin Weale said the Monetary Policy Committee ‘has to be ready to do what it can to support the economy,’ and the central bank may show an increased willingness to expand monetary policy further as the region faces a slowing recovery. In turn, there could be a growing shift within the MPC, and Governor Mervyns King may open the door to expand the asset purchase program beyond the GBP 200B target in an effort to stem the risk for a double-dip recession. As a result, the GBP/USD may continue to consolidate in the days ahead, and the exchange rate may make another run at the 200-Day moving average (1.6103) as the pair appears to have carved out a near-term top.

Will the Descending Triangle in the EUR/USD Continue To Play Out? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst:

FX Upcoming










Bloomberg Consumer Comfort Index (AUG 21)











Retail Sales Ex Inflation (QoQ) (2Q)



Rises for two straight quarters.



Food Prices (MoM) (JUL)



Biggest advance since January 2010.



Nationwide Consumer Confidence (JUL)



Lowest since April.



CBAHIA House Affordability (2Q)



Highest since 1Q 2010.



German GfK Consumer Confidence Survey (SEP)



Lowest since November 2010.



ZEW Survey (Expectations) (AUG)



Lowest since December 2008.



CBI Reported Sales (AUG)



Lowest since May 2010.



Initial Jobless Claims (AUG 20)



Hits five-week high.



Continuing Claims (AUG 13)



Lowest since September 2008.