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Euro Optimism Fizzles Amid ECB Chatter, Pound Rallies On BoE Policy

Euro Optimism Fizzles Amid ECB Chatter, Pound Rallies On BoE Policy

2012-08-08 12:45:00
David Song, Strategist
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Talking Points

  • Euro: ECB To Hold Off On Asset Purchases, S&P Cuts Greece’s Outlook
  • British Pound: Range Remains Intact Even As BoE Cuts Growth, Inflation
  • U.S. Dollar: Benefits From Risk Aversion, Fed’s Fisher Talks Down QE3

Euro: ECB To Hold Off On Asset Purchases, S&P Cuts Greece’s Outlook

The Euro slipped to 1.2325 amid reports that the European Central Bank will not purchase government debt until the German Constitutional Court rules on the bailout fund, which is scheduled for September 12, while Standard and Poor’s fired another warning shot against Greece as the group lowered its credit rating outlook to negative from stable. Meanwhile, German policy makers took another stab at restoring investor confidence and said that the opposition from Bundesbank President Jens Weidmann won’t derail the ECB’s plan to tackle the debt crisis, but we may see market sentiment continue to taper off ahead of the interest rate decision on tap for September 6 as the region heads for a prolonged recession.

In turn, market participants are pricing an 82% chance for a 25bp rate cut next month according to Credit Suisse overnight index swaps, and it seems as though the Governing Council implement a range of policy tools throughout the second-half of the year as the fundamental outlook for the region turns increasingly bleak. As the EURUSD fails to put in a close above the 50-Day SMA (1.2402), the pair appears to be carving out a lower top in August, and the downward trend carried over from 2011 should continue to take shape as the relative strength index on the euro-dollar continues to find resistance around the 55 figure.

British Pound: Range Remains Intact Even As BoE Cuts Growth, Inflation

The British Pound bounced back from an overnight low of 1.5571 as Bank of England Governor Mervyn King warned that further rate cuts would be ‘counterproductive,’ and it seems as though the Monetary Policy Committee will continue to endorse a wait-and-see approach over the coming months as the as the Funding for Lending program is expected to boost private sector activity. Although the BoE lowered its forecast for growth and inflation, it seems as though the central bank is moving to the sidelines as euro-area policy makers increase their effort to address the debt crisis, and we may see Governor King strike a more balanced tone for monetary policy as central bank officials anticipate to see a gradual recovery in the U.K. As the GBPUSD maintains the range-bound price action carried over from June, the sterling may continue to track sideways ahead of the BoE Minutes on tap for the following week, and the rebound in the exchange rate may continue to gather pace should the statement continue to sap bets for more easing.

U.S. Dollar: Benefits From Risk Aversion, Fed’s Fisher Talks Down QE3

The greenback bounced back on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,023, and the reserve currency may continue to gain ground during the North American trade as market participants scale back their appetite for risk. Meanwhile, Dallas Fed President Richard Fisher continued to talk down speculation for additional monetary support, stating that the FOMC ‘has done enough,’ and warned of ‘overburdening the central banks’ as market participants continue to call for another large-scale asset purchase program. As the FOMC continues to carry out ‘Operation Twist,’ we should see the committee endorse a wait-and-see approach throughout the second-half of the year, and the Fed may continue to move away from quantitative easing as the economy gets on a more sustainable path.

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

14:30

10:30

DOE U.S. Crude Oil Inventories (AUG 3)

-6522K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (AUG 3)

-2174K

USD

14:30

10:30

DOE U.S. Distillate Inventory (AUG 3)

-974K

NZD

22:45

18:45

Employment Change (QoQ) (2Q)

0.4%

0.4%

NZD

22:45

18:45

Employment Change (YoY) (2Q)

1.2%

0.9%

NZD

22:45

18:45

Unemployment Rate (2Q)

6.5%

6.7%

NZD

22:45

18:45

Participation Rate (QoQ) (2Q)

68.6%

68.8%

--- 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.

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

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