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Forex: Euro To Hold Resistance, Sterling Consolidation On Tap

Forex: Euro To Hold Resistance, Sterling Consolidation On Tap

2011-10-14 13:25:00
David Song, Currency Strategist
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Talking Points

  • Euro: G20 Meeting Takes Center Stage, ECB Maintains Cautious Tone
  • British Pound: To Consolidate Further, Outlook Hinges On BoE Minutes
  • U.S. Dollar: Weighed By Risk, Fundamental Outlook Improves

Euro: G20 Meeting Takes Center Stage, ECB Maintains Cautious Tone

Hopes surrounding the G20 meeting in Paris pushed the Euro to a high of 1.3862, and the single-currency may continue to recoup the losses from the previous month as market participants see the International Monetary Fund playing a greater role in shoring up the euro-area. At the same time, European Central Bank board member Juergen Stark floated the idea of creating a European Budget Office to strengthen the ties within the monetary union, and went onto say that the Greece leaving the fixed-exchange rate system is not an option.

However, Governing Council member Erkki Liikanen held a cautious tone for the region and encouraged the EU to increase its efforts in addressing the debt crisis as the fundamental outlook remains clouded with ‘high uncertainty.’ As Europe faces a slowing recovery, the heightening risk of a double-dip recession is like to spur an increased reliance on the ECB, and the central bank may show a greater willingness to scale back the rate hikes from earlier this year as growth and inflation falter. Speculation for lower borrowing costs dampens the outlook for the single-currency, and the relief rally in the EUR/USD may taper off as the pair appears to be carving out a near-term top just below the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900. In turn, we may see the EUR/USD consolidate in the days ahead, and the exchange rate may fall back towards the 38.2% Fib around 1.3100 as market participants see lower interest rates in Europe.

British Pound: To Consolidate Further, Outlook Hinges On BoE Minutes

The British Pound continued to appreciate on Friday, with the GBP/USD advancing to 1.5822, but the sterling may consolidate ahead of the Bank of England meeting minutes on tap for the following week as market participants weigh the prospects for future policy. Indeed, we expect the BoE to maintain a dovish tone for monetary policy given the slowing recovery in the U.K., and the central bank may keep the door open to expand its asset purchase program beyond the GBP 275B target as Governor Mervyn King sees a greater risk of undershooting the 2% target for inflation. Should the central bank keep the door open to increase QE further, dovish comments from the MPC is likely to instill a bearish outlook for the sterling, and the GBP/USD may give back the rebound from 1.5273 as interest rate expectations falter.

U.S. Dollar: Weighed By Risk, Fundamental Outlook Improves

The greenback continued to lose ground against its major counterparts and the reserve currency may trade heavy throughout the remainder of the day as market participants increase their appetite for yields. As equity futures foreshadow a higher open for the U.S. market, the rise in risk looks poised to carry into the North American trade, but the dollar may regain its footing over the near-term as the fundamental outlook for the world’s largest economy improves. As the recovery gather space, the Fed may talk down speculation for another round of quantitative easing, and the central bank may see scope to start normalizing monetary policy in the following year as growth prospects improve.

--- 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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