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Euro Optimism Fizzles Amid Weakening Outlook, Sterling Capped

Euro Optimism Fizzles Amid Weakening Outlook, Sterling Capped

2012-02-21 14:25:00
David Song, Strategist
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Talking Points

  • Euro: Greece Secures Second Bailout, S&P Warns Of Tight Funding Conditions
  • British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA
  • U.S. Dollar: Index To Consolidate, Fundaments To Improve Further

Euro: Greece Secures Second Bailout, S&P Warns Of Tight Funding Conditions

The Euro pared the overnight advance to 1.3242 as market participants remained skeptical that the new measures will prevent a Greek default, and the single currency may face additional headwinds over the near-term as the ongoing turmoil in the financial system heightens the risk for contagion. Indeed, Standard and Poor’s warned of unfavorable funding conditions for the bank sector as the European Central Bank prepares to launch its second three-year loan facility, and the weakening outlook for the euro-area may continue to drag on the exchange rate as the region remains at risk of a major economic downturn in 2012.

In response, European Union Economic and Monetary Affairs Commissioner Olli Rehn floated the idea of boosting the lending capacity of the rescue fund at the EU Summit scheduled for March 2, and went onto say that the Greek PSI will not set precedence for the periphery countries while speaking Brussels. As European policy makers step up their efforts to stem the risk for contagion, the EUR/USD may continue to track sideways over the near-term, but the single currency looks to be carving a top just below the 100-Day SMA (1.3312) as there appears to be a bearish divergence in the relative strength index. As market optimism fizzles, we may see the euro-dollar make another run at 1.3000, but we would like to see the euro-dollar close below the 50-Day SMA (1.3018) to see the pair give back the advance from earlier this year.

British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA

The British Pound slipped to an overnight low of 1.5772 even as the U.K. government posted the first budget surplus in four years, and the sterling may continue to give back the rebound from the previous week should the shift away from risk-taking behavior gather pace. Nevertheless, as Britain remains ahead of the curve in balancing its public finances, we may see market participants treat U.K. assets as a safe-haven, but the Bank of England Minutes on tap for tomorrow may keep the sterling in-line with its major counterparts should the central bank continue to soften its dovish tone for monetary policy. However, as the pound-dollar remains capped by the 200-Day SMA at 1.5917, the pair looks poised to track sideways over the near-term, and the technical outlook certainly fosters a bearish forecasts for the GBP/USD as it appears to be carving out a top in February.

U.S. Dollar: Index To Consolidate, Fundaments To Improve Further

The greenback regained its footing on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,845, but it seems as though we’re seeing a rebound in risk appetite as the U.S. equity market opens higher. Indeed, the shift in market sentiment is likely to dampen the appeal of the reserve currency, and we may see the index consolidate during the North American trade as it struggles to hold above the 50.0% Fibonacci retracement around 9,830. Nevertheless, as the fundamental developments on tap for this week are expected to instill an improved outlook for the world’s largest economy, easing bets for another large-scale asset purchase program should prop up the USD, and the greenback may continue to retrace the selloff from earlier this year as we anticipate the Federal Reserve to soften its dovish tone for monetary policy.

--- 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

EUR

15:00

10:00

Euro-Zone Consumer Confidence (FEB A)

-20.1

-20.7

Currency

GMT

Release

Expected

Actual

Comments

NZD

2:00

Reserve Bank of New Zealand 2-Year Inflation Expectation (1Q)

--

2.5%

Slowest pace of growth since 3Q 2009.

JPY

4:30

All Industry Activity Index (MoM) (DEC)

1.5%

1.3%

Rises for the seventh time.

CHF

7:00

Trade Balance (Swiss franc) (JAN)

2.50B

1.55B

Marks the smallest surplus since August.

CHF

7:00

Exports (MoM) (JAN)

--

-3.4%

CHF

7:00

Imports (MoM) (JAN)

--

3.6%

CHF

8:00

Money Supply M3 (YoY) (JAN)

--

8.2%

Fastest pace of growth since November 2003.

GBP

9:30

Public Finances (PSNCR) (Pounds) (JAN)

-23.0B

-16.8B

Posts the first budget surplus in four years.

GBP

9:30

Public Sector Net Borrowing (Pounds) (JAN)

-9.1B

-10.7B

GBP

9:30

Public Sector Net Borrowing ex Interventions (JAN)

-6.3B

-7.8B

CAD

13:30

Retail Sales (MoM) (DEC)

-0.2%

-0.2%

Declines for the first time since July.

CAD

13:30

Retail Sales Less Autos (MoM) (DEC)

0.1%

0.0%

CAD

13:30

Wholesale Sales (MoM) (DEC)

0.6%

0.9%

Rises for the ninth time in 2011.

USD

13:30

Chicago Fed National Activity Index (JAN)

0.21

0.22

Holds in positive territory for second month.

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