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USD Struggles Ahead Of FOMC Minutes, Euro Weakness Ahead

USD Struggles Ahead Of FOMC Minutes, Euro Weakness Ahead

2012-01-03 14:20:00
David Song, Strategist
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Talking Points

  • U.S. Dollar: Weakens Across The Board Ahead Of ISM Manufacturing, FOMC Minutes
  • Euro: Capped By 20-Day SMA, Greece Raises Threat Of Euro-Area Breakup
  • British Pound: U.K. Prepares Contingency Plan To Shield Economy

U.S. Dollar: Weakens Across The Board Ahead Of ISM Manufacturing, FOMC Minutes

The greenback weakened against all of its major counterparts on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tumbling to a low of 9,871, but we may see the reserve currency recoup the losses during the overnight trade as the economic docket dampens the prospects for additional monetary support. As the U.S. ISM Manufacturing report is expected to reinforce an improved outlook for future growth, the Federal Open Market Committee may continue to soften its dovish tone for monetary policy, and the meeting minutes could instill a bullish outlook for the greenback should the central bank talk down speculation for another large-scale asset purchase program.

As Fed officials see economic activity gradually gathering pace in 2012, the more robust recovery certainly limits the central bank’s scope to conduct another round of quantitative easing, and the FOMC may endorse a wait-and-see approach throughout the first-half of 2012 as it aims to balance the risks for the region. As the central bank concludes its easing cycle, the shift in the policy outlook should prop up the USD, and we may see the reserve currency gain ground throughout 2012 as market participants see the Fed normalizing monetary policy over the medium-term. However, as the fundamental outlook for the world economy remains clouded with high uncertainty, Fed Chairman Ben Bernanke may keep the door to expand monetary policy further, and dovish comments from the central bank head is likely to dampen the appeal of the greenback as investors still see a risk for QE3.

Euro: Capped By 20-Day SMA, Greece Raises Threat Of Euro-Area Breakup

The Euro advanced to a high of 1.3058 following the better-than-expected employment report coming out of Germany, but the rebound in the single currency is likely to be short-lived as European policy makers struggle to contain the sovereign debt crisis. Indeed, the EU is rushing to nail out the details of the second bailout package for Greece, but there’s increased fears that there could be a euro-area breakup should the region fail to secure the EUR 130B rescue program. As the heightening risk for contagion drags on market sentiment, the bearish sentiment underlining the Euro should gather pace in 2012, and the exchange rate looks poised to weaken further over the near-term as the EUR/USD maintains the downward trend carried over from the previous year. As the euro-dollar fails to push back above the 20-Day SMA (1.3058), we should see the exchange rate come off during the North American trade, but the rise in trader sentiment may prop up the single currency as risk trends continue to dictate price action in the foreign exchange market.

British Pound: U.K. Prepares Contingency Plan To Shield Economy

The British Pound fell back from an overnight high of 1.5624 and the sterling may continue to give back the rebound from the end of 2011 (1.5360) as the U.K. faces an increased risk of a double-dip recession. As the economic slowdown dampens the outlook for inflation, the Bank of England is widely expected to expand its asset purchase program beyond the GBP 275B target, but we may see market participants treat the sterling as a safe-haven as Britain remains ahead of the curve in balancing its public finances. As the sovereign debt crisis raises the threat of seeing large capital flows across Europe, there were reports that the U.K. government is preparing a contingency plan to shield the U.K. economy, but expectations for more quantitative easing could dampen the appeal of the British Pound as the fundamental outlook for the region turns increasingly bleak.

--- 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.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Construction Spending (MoM) (NOV)

0.4%

0.8%

USD

15:00

10:00

ISM Manufacturing (DEC)

53.4

52.7

USD

15:00

10:00

ISM Prices Paid (DEC)

48.0

45.0

USD

19:00

14:00

Federal Open Market Committee Meeting Minutes

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

22:30

AiG Performance of Manufacturing Index (DEC)

--

50.2

Expands for the first time since June.

CNY

0:01

Purchasing Manager Index Non-Manufacturing (DEC)

--

56.0

Expands for the 10th time in 2011.

AUD

5:30

RBA Commodity Price Index (DEC)

--

104.5

Slowest pace of growth since March 2010.

AUD

5:30

RBA Commodity Index SDR (YoY) (DEC)

--

10.9%

CHF

8:30

SVME-Purchasing Managers Index (DEC)

45.4

50.7

Expands for the first time since August.

EUR

8:55

German Unemployment Change (DEC)

-10K

-22K

Declines for the 11th month in 2011.

EUR

8:55

German Unemployment Rate s.a. (DEC)

6.9%

6.8%

GBP

9:30

Purchasing Manager Index Manufacturing (DEC)

47.3

49.6

Contracts for the third month.

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