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Euro Benefits From Bond Purchase Talk, USD Looks Higher Ahead Of FOMC

Euro Benefits From Bond Purchase Talk, USD Looks Higher Ahead Of FOMC

2012-07-27 12:45:00
David Song, Strategist
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Talking Points

  • Euro: ECB To Keep Rates On Hold, Expand Balance Sheet Further
  • U.S. Dollar: 2Q GDP Tops Forecast, Fed To Soften Dovish Tone

Euro: ECB To Keep Rates On Hold, Expand Balance Sheet Further

The Euro advanced to 1.2313 amid reports that the European Central Bank is preparing to reinstate its asset purchase program, while German Chancellor Angela Merkel and French President Francois Hollande are expected to hold a conference call later today to discuss additional assistance for Spain. At the same time, Germany policy makers floated the idea of using the European Financial Stability Facility to purchase government debt amid the heightening threat for contagion, but these new initiatives may fail to get off the floor as European policy makers struggle to meet on common ground.

Indeed, the Bundesbank argued that the ECB should refrain from purchasing government debt as ‘they blur the line between monetary and fiscal policy,’ but it seems as though the Governing Council is looking to implement a range of tools over the coming months amid the ongoing turmoil in the financial system paired with the growth threat for a prolonged recession. As the ECB is widely expected to keep the benchmark interest rate at 0.75% in August, market participants will certainly pay close attention to the press conference with President Mario Draghi, but the central bank head may sound more dovish this time around as the debt crisis continues to drag on the real economy. As the rebound from 1.2042 gathers pace, we could see the EURUSD make a run at the 50-Day SMA (1.2443), but we will be keeping a close eye on the relative strength index as it maintains the downward trend from back in February. As a result, we will remain bearish the EURUSD as long as it continues to hold below the moving average, and we may see the pair come under pressure next week should the ECB cast a dour outlook for the region.

U.S. Dollar: 2Q GDP Tops Forecast, Fed To Soften Dovish Tone

The greenback is regaining its footing going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight decline to 10,019, and the reserve currency may track higher in the coming days as the recovery in the world’s largest economy gradually gathers pace. Indeed, the advance GDP report showed the U.S. expanding 1.5% versus forecasts for a 1.4% print, while the personal consumption advanced 1.5% during the same period amid expectations for a 1.3% rise. In turn, the Fed may sound more upbeat at its policy meeting on tap for the following week, and we should see the FOMC stick to its current policy throughout the remainder of the year as the economy gets on a more sustainable path. In turn, we will maintain our bullish outlook for the USD, and we may see a strong dollar in August as the Fed continues to move away from 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.

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