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Euro Euphoria To Fizzle, Sterling Setting Stage For Another Rally

Euro Euphoria To Fizzle, Sterling Setting Stage For Another Rally

David Song, Strategist

Talking Points

  • Euro: Greece Passes More Austerity, EU To Vote On February 15
  • British Pound: Carving Out Short-Term Base Amid Easing Bets For More QE
  • U.S. Dollar: Index Gives Back Overnight Advance But Poised For Reversal

Euro: Greece Passes More Austerity, EU To Vote On February 15

The Euro climbed to 1.3283 as Greece approved the budget-cutting measures laid out by the Troika – the European Central Bank, the European Commission and the International Monetary Fund – but the single currency still appears to be carving out a near-term top as the EUR/USD remains capped by the 100-Day SMA (1.3331). With the Greek vote out of the way, the EU is scheduled to vote on the EUR 130B bailout on February 15, and this event could set precedence across the euro-area as the governments operating under the monetary union continue to face high financing costs.

As European policy makers take unprecedented steps to save Greece, Portugal may be next in line to receive additional assistance, and we may see the European Central Bank continue to cast a dovish outlook for monetary policy as the push for more austerity dampens the outlook for growth. According to Credit Suisse overnight index swaps, market participants see a 56% chance for a 25bp rate cut at the next rate decision on March 8, but we may see ECB President Mario Draghi stick to a wait-and-see approach as the central bank prepares to launch its second three-year loan facility at the end of the month. In turn, we may see the EUR/USD face sideways price action over the near-term, but we maintain a bearish outlook for the pair European policy makers struggle to restore investor confidence.

British Pound: Carving Out Short-Term Base Amid Easing Bets For More QE

The British Pound rallied to 1.5826 following the rise in risk appetite, and the sterling may continue to recoup the losses from earlier this month as market participants scale back speculation for additional monetary easing. Indeed, the Confederation of British Industry talked down expectations for more quantitative easing as the group sees the U.K. skirting a double-dip recession, and we may see the Bank of England continue to soften its dovish tone for monetary policy as the recovery gradually gathers pace. As former resistance (the 38.2% from the 2009 low to high around 1.5730-50) appears to be playing as new support, the GBP/USD appears to be laying out a short-term base, and we may see the sterling make another run at the 200-Day SMA (1.5934) as the fundamental outlook for the U.K. picks up.

U.S. Dollar: Index Breaks Out Of Downward Trend, Weakness To Be Short-Lived

The greenback pared the advance from Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,728, and the reserve currency may continue to consolidate during the North American trade as the rise in risk-taking behavior gather space. As the U.S. equity market opens higher, shift in market sentiment is likely to dampen the appeal of the dollar, but the short-term reversal in the USD looks poised to gather pace as the index breaks out of the downward trend carried over from the previous month. Nevertheless, as the economic docket scheduled for this week is expected to encourage an improved outlook for the world’s largest economy, a slew of positive developments should dampen the Fed’s scope to push through another large-scale asset purchase program, and we expect the FOMC to endorse a neutral policy stance as the risk for a double-dip recession subsides.

--- 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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