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Euro Outlook Turns Increasingly Bleak, Sterling Weighed By BoE

Euro Outlook Turns Increasingly Bleak, Sterling Weighed By BoE

2011-12-14 15:25:00
David Song, Currency Strategist
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Talking Points

  • Euro:Italian Yields Surge, Bundesbank To Lend Through IMF
  • British Pound: BoE Sees Increased Risk Of Double-Dip Recession
  • U.S. Dollar: Index To Mark Higher High On Flight To Safety

Euro: Italian Yields Surge, Bundesbank To Lend Through IMF

The Euro slipped to a fresh monthly low of 1.2964 as Italy sold EUR 3B in five-year bonds with a record yield of 6.47%, and the single currency is likely to face additional headwinds over the near-term as European policy makers struggle to restore investor confidence. In response, Bundesbank President Jens Weidmann said that the central may could lend up to EUR 45B to the International Monetary Fund but only if non-euro nations follow suit, and there could be increased pressure on the European Central Bank to further expand its nonstandard measures as heightening finance costs instills a dour outlook for the region.

Nevertheless, ECB board member Klaas Knot placed the burden on the EU and said that the central bank cannot solve the crisis, and went onto say that at least EUR 1 trillion will be need to solve the debt crisis according to an interview with a Dutch magazine. At the same time, Governing Council member Yves Mersch said that the committee must focus on its primary mandate to ensure price stability while speaking in Luxembourg, and it looks as though we will see the ECB refrain from a large-scale asset purchase program as there appears to be a growing rift within the group. In turn, it seems as though President Mario Draghi will continue to target the benchmark interest rate in 2012, and the central bank head may bring the benchmark interest rate below 1.00% in the first quarter of the following year as the region braces for a ‘mild recession.’ As the fundamental outlook for the euro-area turns increasingly bleak, the EUR/USD may threaten the rebound from back in January (1.2872), and we may see the single currency end the year lower as the heightening risk for contagion continues to bear down on investor confidence.

British Pound: BoE Sees Increased Risk Of Double-Dip Recession

The British Pound gave back the overnight advance to 1.5531 as the Bank of England turned increasingly cautious towards the economy, and the sterling looks poised to weaken further as the region faces an increased risk of a double-dip recession. Bank of England board member Spencer Dale warned that the U.K. could face ‘one or two quarter of negative,’ but went onto say that the recovery will gradually gather pace in the second-half of 2012 while speaking in London. As the fundamental outlook for Britain turns increasingly bleak, the BoE Minutes on tap for the following week could highlight an increased willingness to expand the asset purchase program beyond the GBP 275B target, and we may see the GBP/USD threaten the rebound from 1.5270 as market participants expect to see additional monetary stimulus in the following year.

U.S. Dollar: Index To Mark Higher High On Flight To Safety

The greenback continued to appreciate against its major counterparts, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to fresh monthly high of 10,067, and the reserve currency looks poised to push higher over the remainder of the week as the flight to safety gathers pace. As the U.S. equity market pushes lower, the drop in risk sentiment should prop up the reserve currency throughout the North American trade, and the index looks poised to carve out a higher high in the days ahead as the Fed softens its dovish tone for monetary policy. In turn, the USD looks poised to appreciate further in the following year, and we may see market participants turn increasing bullish against the greenback as the FOMC continues to talk down speculation for another large-scale asset purchase program.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (DEC 9)

-2500K

1336K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (DEC 9)

1200K

5147K

USD

15:30

10:30

DOE U.S. Distillate Inventory (DEC 9)

1000K

2533K

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

Westpac Consumer Confidence (DEC)

--

-8.3%

Declines for the seventh time this year.

AUD

23:30

Westpac Consumer Confidence Index (DEC)

--

94.7

AUD

0:00

DEWR Internet Skilled Vacancies (MoM) (NOV)

--

-1.0%

Falls for the sixth straight month.

NZD

2:00

Non Resident Bond Holdings (NOV)

--

60.2%

Lowest since July.

JPY

4:30

Industrial Production (MoM) (OCT F)

--

2.2%

Expands for the seventh time this year.

JPY

4:30

Industrial Production (YoY) (OCT F)

--

0.1%

JPY

4:30

Capacity Utilization (MoM) (OCT F)

--

4.1%

CHF

8:15

Producer & Import Prices (MoM) (NOV)

-0.2%

-0.8%

Biggest decline since December 2009.

CHF

8:15

Producer & Import Prices (YoY) (NOV)

-1.8%

-2.4%

GBP

9:30

Jobless Claims Change (NOV)

13.7K

3.0K

Increases for the tenth time this year.

GBP

9:30

Claimant Count Rate (NOV)

5.1%

5.0%

GBP

9:30

ILO Unemployment Rate (3M) (OCT)

8.3%

8.3%

GBP

9:30

Average Weekly Earnings inc Bonus (3MoY) (OCT)

2.0%

2.0%

Slowest pace of growth since April.

GBP

9:30

Average Weekly Earnings ex Bonus (3MoY) (OCT)

1.7%

1.8%

EUR

10:00

Euro-Zone Industrial Production s.a. (MoM) (OCT)

0.0%

-0.1%

Declines for the fourth time in 2011.

EUR

10:00

Euro-Zone Industrial Production w.d.a. (YoY) (OCT)

2.1%

1.3%

CHF

10:00

ZEW Survey (Expectations) (DEC)

--

-72.0

Lowest since September.

USD

12:00

MBA Mortgage Applications (DEC 9)

--

4.1%

Rises for the second week.

CAD

13:30

Leading Indicators (MoM) (NOV)

0.3%

0.8%

Biggest advance since February.

CAD

13:30

Manufacturing Shipments (MoM) (OCT)

-0.6%

-0.8%

Declines for the first time since June.

USD

13:30

Import Price Index (MoM) (NOV)

1.0%

0.7%

Rises for the first time since July.

USD

13:30

Import Price Index (YoY) (NOV)

10.2%

9.9%

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