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Euro Remains Capped As Optimism Fizzles, ECB Independence At Risk

Euro Remains Capped As Optimism Fizzles, ECB Independence At Risk

2012-08-28 12:50:00
David Song, Strategist
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Talking Points

  • Euro: ECB Skips Jackson Hole, Risks Independence With Bond Purchases
  • British Pound: BoE’s Posen Supports More QE, Former Resistance To Act As Support
  • U.S. Dollar: Case-Shiller Home Price Index, Consumer Confidence On Tap

Euro: ECB Skips Jackson Hole, Risks Independence With Bond Purchases

The Euro advanced to a high of 1.2559 as the European Central Bank announced all Executive Board members, including President Mario Draghi, will not attend the Jackson Hole Economic Symposium scheduled for later this week, while there’s talk that the central bank is looking to reduce the cost of borrowing against asset-backed securities in an effort to boost private sector lending. However, former ECB board member Juergen Stark warned that restoring the bond-purchase program ‘will further erode the independence from politics,’ and argued that ‘in the end, the central bank will no longer be able to fulfill its core mandate’ as European policy makers become increasingly reliant on monetary support.

In turn, there’s growing bets that the ECB will lay out a more detailed bond-purchase program at the September 6 meeting, but we may see a growing rift within the Governing Council as the region heads for a deepening recession. Beyond the non-standard measures, we should see the central bank continue to target the benchmark interest rate as growth and inflation tapers off, and the board may have little choice but to carry its easing cycle into the following year as the governments operating under the single currency struggle to get their house in order. As the EURUSD makes another failed run at the 100-Day SMA (1.2598), the short-term rally may taper off going into September, and we will maintain our bearish forecast for the pair as the downward trend carried over from 2011 continues to take shape.

British Pound: BoE’s Posen Supports More QE, Former Resistance To Act As Support

The British Pound bounced back from 1.5752 amid the rise in risk-taking behavior, but we may see the GBPUSD trade heavy going into September as the Bank of England maintains a dovish tone for monetary policy. BoE dove Adam Posen continued to endorse more quantitative easing, stating that expanding the balance sheet further would have a positive impact on the real economy, but it seems as though Governor Mervyn King is looking to sit on the sidelines as the new lending program gets under way. Nevertheless, as the BoE is widely expected to maintain its current policy in September, former resistance around the 1.5740-50 figure may act as interim support, and the GBPUSD looks poised to track higher over the near-term as it carves out an upward trend.

U.S. Dollar: Case-Shiller Home Price Index, Consumer Confidence On Tap

The greenback gave back the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,994, but we may see the reserve currency regain its footing over the next 24-hours of trading as the economic docket is expected to encourage an improved outlook for the U.S. Rising home prices paired with an uptick on consumer confidence should help to alleviate the bearish sentiment surrounding the dollar, and the greenback may track higher going into the Jackson Hole conference as positive developments coming out of the world’s largest economy dampens expectations for another round of quantitative easing.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:00

9:00

S&P/Case-Shiller US Home Price Index (YoY) (2Q)

-1.92%

USD

13:00

9:00

S&P/Case-Shiller US Home Price Index (2Q)

123.33

USD

13:00

9:00

S&P/Case-Shiller Composite-20 s.a. (MoM) (JUN)

0.30%

0.91%

USD

13:00

9:00

S&P/Case-Shiller Composite-20 (YoY) (JUN)

-0.20%

-0.66%

USD

13:00

9:00

S&P/Case-Shiller Home Price Index (JUN)

138.96

USD

14:00

10:00

Consumer Confidence (AUG)

66.0

65.9

USD

14:00

10:00

Richmond Fed Manufacturing Index (AUG)

-11

-17

--- 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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