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Euro Support To Give Way, Sterling Outlook Weighed By More QE

Euro Support To Give Way, Sterling Outlook Weighed By More QE

2012-01-13 14:30:00
David Song, Strategist
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Talking Points

  • Euro: Italy Bond Auction Fails To Impress, Downward Trend To Gather Pace
  • British Pound: 50.0% Fib To Give Way On Recession Risk, BoE Minutes
  • U.S. Dollar: To Benefit From Flight To Safety, Index Eyes 10,117

Euro: Italy Bond Auction Fails To Impress, Downward Trend To Gather Pace

The EUR/USD slipped to 1.2765 as Italy’s long-term bond auction failed to impress market participants, and the exchange rate should weaken further in the week ahead as European policy makers struggle to restore investor confidence. Beyond the debt sale, the European Central Bank spoke out against the EU and said that the most recent outline of the new fiscal compact is a ‘substantial watering down compared to previous drafts,’ and the Governing Council may have little choice but to further expand monetary policy as European officials struggle to contain the debt crisis.

As the ongoing turmoil in the financial system drags on the real economy, ECB board member Erkki Liikanen warned that the ‘functioning of financial markets is a great risk in Europe,’ and we expected the central bank to expand its balance sheet further in 2012 in an effort to shore up the banking sector. As the EUR/USD remains confined by the downward trending channel carried over from the end of October, the lack of momentum to push above the 20-Day SMA at 1.2923 certainly opens the door for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, but the short-term floor on the euro-dollar may give out as the fundamental landscape for Europe turns increasingly bleak. In turn, we should see the downward trend continue to unfold over the near-term, and we could see the exchange rate fall back towards 1.2500 to test for psychological support.

British Pound: 50.0% Fib To Give Way On Recession Risk, BoE Minutes

The British Pound pared the overnight advance to 1.5408 as market participants scaled back their appetite for risk, and the shift away from risk-taking behavior may trigger another test of the 50.0% Fib (1.5270-1.5300) as the U.K. faces an increased risk of a double-dip recession. As the developments coming out of the U.K. highlights a weakened outlook for growth and inflation, market participants appear to be increasing bets for more quantitative easing, and the Bank of England policy meeting minutes could prompt a sharp selloff in the exchange rate should the central bank see greater scope to expand its asset purchase program beyond the GBP 275B target. In turn, it may be only a matter time before the 50.0% Fib gives way, and we may see the exchange rate come up against the 61.8% Fib around 1.4850 as the pair gives back the advance from the previous year.

U.S. Dollar: To Benefit From Flight To Safety, Index Eyes 10,117

The greenback regained its footing coming into the North American, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,023, and the reserve currency should appreciate further during the North American trade as the shift away from risk-taking behavior gathers pace. Indeed, there are rumors that we will see France lose its AAA credit rating later today amid the ongoing turmoil in the euro-area, and the event would certainly trigger a flight to safety as investor confidence remains frail. As the USDOLLAR appears to have carved out another higher low this week, the rebound in the index could spur a run at the 78.6% Fib (10,117), and the bullish sentiment underlining the greenback should gather pace over the near-term as market participants curb their appetite for risk.

--- 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

14:55

09:55

U. of Michigan Confidence (JAN P)

71.5

69.9

USD

17:45

12:45

Fed's Jeffrey Lacker Speaks on U.S. Economy

--

--

USD

18:00

13:00

Fed’s Charles Evans Speaks on U.S. Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Japan Money Stock M2+CD (YoY) (DEC)

3.0%

3.1%

Fastest pace of growth since May 2010.

JPY

23:50

Japan Money Stock M3 (YoY) (DEC)

2.5%

2.6%

CNY

03:00

Foreign Exchange Reserves (DEC)

$3200.0B

$3181.1B

Narrows for second month.

JPY

04:00

Bankruptcies (YoY) (DEC)

--

-6.4%

Declines for the eighth time this year.

GBP

09:30

Producer Price Index Input n.s.a. (MoM) (DEC)

-0.2%

-0.6%

Slowest pace of growth since October 2010.

GBP

09:30

Producer Price Index Input n.s.a. (YoY) (DEC)

9.1%

8.7%

GBP

09:30

PPI Output n.s.a. (MoM) (DEC)

0.1%

-0.2%

Lowest reading since December 2010.

GBP

09:30

PPI Output n.s.a. (YoY) (DEC) (DEC)

5.0%

4.8%

GBP

09:30

PPI Output Core n.s.a. (MoM) (DEC)

0.0%

-0.1%

GBP

09:30

PPI Output Core n.s.a. (YoY) (DEC)

3.2%

3.0%

EUR

10:00

Euro-Zone Trade Balance s.a. (euros)

0.5B

6.1B

Largest surplus since July 2004.

EUR

10:00

Euro-Zone Trade Balance (euros)

--

6.9B

CAD

13:30

International Merchandise Trade (Canadian dollar) (NOV)

-0.5B

1.07B

Marks the third surplus in 2011.

USD

13:30

Import Price Index (MoM) (DEC)

-0.1%

-0.1%

Slowest pace of growth since February.

USD

13:30

Import Price Index (YoY) (DEC)

8.4%

8.5%

USD

13:30

Trade Balance (NOV)

-$45.0B

$-47.8B

Largest deficit since June.

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