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Forex: Euro Forecast Remains Bearish, Sterling Outlook Hinges On BoE

Forex: Euro Forecast Remains Bearish, Sterling Outlook Hinges On BoE

2011-09-19 13:35:00
David Song, Currency Strategist
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Talking Points

  • Euro: ECB Curbs Fundamental Outlook, Further Weakness Ahead
  • British Pound: Outlook Hinges On BoE Minutes, Remains Oversold
  • U.S. Dollar: Benefits From Risk Aversion, All Eyes on FOMC

Euro: ECB Curbs Fundamental Outlook, Further Weakness Ahead

Indeed, the EU Summit over the weekend did little to calm market fears, and the lack of urgency to address the sovereign debt crisis is likely to strengthen the bearish sentiment underlying the single-currency as the fundamental outlook for Europe deteriorates. In light of the recent developments, European Central Bank board member Erkki Liikanen warned that the risk to growth is ‘substantially’ tilted to the downside, and went onto say that the risk for a global recession is ‘real’ while speaking in Helsinki.

At the same time, Bundesbank President Jens Weidmann argued that the European Financial Stability Facility curbs the incentive to balance public finances and said that he remains skeptical of buying bonds on the secondary market while testifying in front of parliament. As Governing Council member Jurgen Stark resigns from his post due to his opposition against the central bank’s asset purchasing program, we may see a growing rift with the ECB, but it seems as though we will continue to an increased reliance on the central bank to address the risks for the region as European policy makers struggle to meet on common ground. As market sentiment falters, the EUR/USD looks as though it will give back the advance from earlier this month (1.3494), and the euro may threaten the rebound from back in February (1.3427) as the heightening risk for contagion continues to bear down on investor confidence.

British Pound: Outlook Hinges On BoE Minutes, Remains Oversold

The British Pound slipped to a fresh monthly low of 1.5674 and the sterling may face additional headwinds over the week should the Bank of England show an increased willingness to expand monetary policy further. The BoE minutes may highlight a dour outlook for the U.K. in light of the slowing recovery, and an increasing number of the MPC may see scope to increase the asset purchase program beyond the GBP 200B target as policy makers see a growing risk of undershooting the 2% target for inflation. In turn, the GBP/USD may continue to give back the advance from earlier this year, and the exchange rate may threaten the rebound from last December (1.5344) as the U.K. faces an increased risk of a double-dip recession. However, should the BoE endorse a wait-and-see approach for the remainder of the year, we are likely to get a near-term correction in the British Pound as the GBP/USD remains oversold.

U.S. Dollar: Benefits From Risk Aversion, All Eyes on FOMC

The U.S. dollar gained ground on Monday as market participants scaled back their appetite for yields, and the shift in risk sentiment should prop up the reserve currency throughout the North American trade as it benefits from safe-haven flows. However, the USD may consolidate in the days ahead as the FOMC interest rate decision comes into focus, and comments from the central bank may instill a bearish outlook for the greenback as Fed Chairman Ben Bernanke looks to employ additional policy tools to stimulate the ailing economy. However, if we see the committee preserve a wait-and-see approach, the recent strength in the dollar should gather pace over the near-term, and the USD may continue to recoup the losses carried over from the previous month as market participants scale back speculation for further easing.

Will the EUR/USD Break Below the 50.0% Fib? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

NAHB Housing Market Index (SEP)

15

15

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:00

Westpac NZ Consumer Confidence (3Q)

--

112.0

Holds steady for second quarter.

NZD

22:30

Performance Services Index (AUG)

--

53.9

Lowest since May.

GBP

23:01

Rightmove House Prices (MoM) (SEP)

--

0.7%

Increases for the seventh time this year.

GBP

23:01

Rightmove House Prices (YoY) (SEP)

--

1.5%

EUR

9:00

Euro-Zone Construction Output s.a. (MoM) (JUL)

--

1.4%

Biggest advance since January.

EUR

9:00

Euro-Zone Construction Output w.d.a. (YoY) (JUL)

--

1.2%

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