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USD Outlook Hinges On Bernanke, Euro Propped Up By Greek Rumors

USD Outlook Hinges On Bernanke, Euro Propped Up By Greek Rumors

David Song, Strategist

Talking Points

  • U.S. Dollar: Bernanke Testimony In Focus, Watching The 10-Day SMA
  • Euro: Maintains Range As Greece Looks To Finalize Second Bailout
  • British Pound: Carves Near-Term Top Ahead Of BoE Rae Decision

U.S. Dollar: Bernanke Testimony In Focus, Watching The 10-Day SMA

The greenback extended the advance from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to an overnight high of 9,751, and we may see Fed Chairman Ben Bernanke strike an improved outlook for the world’s largest economy as the recovery gradually gathers pace. However, as we expect the central bank head to highlight the ongoing slack in the private sector, Mr. Bernanke may keep the door to expand the Fed’s balance sheet further, and speculation for another round of quantitative easing could halt the recent strength in the reserve currency as market participants weigh the prospects for future policy.

Nevertheless, as the economic docket is expected to show another $7.000B expansion in consumer credit, the development should strengthen the case for a more robust recovery, and we expect the FOMC to maintain a wait-and-see approach throughout the first-half of 2012 as Fed officials warn of the stickiness in the core rate of inflation. As the USDOLLAR threatens the downward trending channel carried over from the previous week, the greenback looks poised for a short-term breakout, but we will need to see the index break and close above the 10-Day SMA (9,755) to pave the way for a reversal.

Euro: Maintains Range As Greece Looks To Finalize Second Bailout

The Euro advanced to 1.3181 amid rumors that Greek is in the final stages of nailing out the details of its second bailout package, but the single currency may continue to give back the advance from the previous month as the fundamental outlook for the region turns increasingly bleak. As the euro-area slips back into recession, we expect the European Central Bank to maintain a dovish outlook for monetary policy, and President Mario Draghi may see scope to push the benchmark interest rate below 1.00% as the slowing recovery dampens the outlook for inflation. Indeed, market participants continue to see a 58% chance for a 25bp rate cut according to Credit Suisse overnight index swaps, but the Governing Council may preserve its neutral policy stance as the central bank prepares to launch another three-year loan facility at the end of the month. As the EUR/USD maintains the narrow range from earlier this week, the exchange rate should continue to bounce along the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, but the ECB rate decision may spark a short-term reversal in the euro-dollar should the central bank talk up speculation for additional monetary support.

British Pound: Carves Near-Term Top Ahead Of BoE Rae Decision

The British Pound pared the overnight decline to1.5787 to maintain the narrow range carried over from the previous week, but the sterling remains poised to come under pressure later this week as the Bank of England is widely expected to expand monetary policy further. According to a survey by Bloomberg News, 49 of the 50 economists polled see the BoE increasing its asset purchase program beyond the GBP 275B target, and the central bank may keep the door open to further expand its balance sheet as the slowing recovery in the U.K. raises the risk of a double-dip recession. As the GBP/USD continues to hold below the 200-Day SMA (1.5948), the pair could be carving out a lower top ahead of the BoE rate decision, and we may see the floor around the 38.2% Fib (1.5730-50) give out should Governor Mervyn King talk up speculation for more quantitative easing.

--- 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

Fed Chairman Ben Bernanke Testifies to Senate Budget Committee

--

--

USD

15:00

10:00

IBD/TIPP Economic Optimism (FEB)

47.1

47.5

USD

20:00

15:00

Consumer Credit (DEC)

$7.000B

$20.374B

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Private Wages inc Overtime (QoQ) (4Q)

0.5%

0.7%

Fastest rate of growth since 4Q 2008.

NZD

21:45

Private Wages ex Overtime (QoQ) (4Q)

0.5%

0.7%

NZD

21:45

Labor Cost Private Sector (QoQ) (4Q)

0.5%

0.0%

AUD

22:30

AiG Performance of Construction Index (JAN)

--

39.8

Contracts for 20 straight months.

JPY

23:50

Official Reserve Assets (JAN)

--

$1306.7B

Highest since the series began in 1980.

GBP

0:01

BRC Sales Like-For-Like (YoY) (JAN)

-0.8%

-0.3%

Declines for the eighth time in the last 13-months.

AUD

3:30

Reserve Bank of Australia Interest Rate Decision

4.00%

4.25%

Keeps door open to lower the cash rate further.

JPY

5:00

Leading Index (DEC P)

93.8

94.3

Highest reading since August.

JPY

5:00

Coincident Index (DEC P)

93.1

93.2

AUD

5:30

Foreign Reserves (Australian dollar) (JAN)

--

46.8B

Largest since July 2010.

EUR

7:45

French Trade Balance (euros) (DEC)

-5350M

-4993M

Holds above -5000M for second month.

EUR

11:00

German Industrial Production s.a. (MoM) (DEC)

0.0%

-2.9%

Largest decline since January 2009.

EUR

11:00

German Industrial Production n.s.a. and w.d.a. (YoY) (DEC)

4.4%

0.9%

CAD

13:30

Building Permits (MoM) (DEC)

1.0%

11.1%

Increases for the sixth time this year.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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