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Euro Struggles As ECB Presents Systemic Risk, Sterling Bucks Trend

Euro Struggles As ECB Presents Systemic Risk, Sterling Bucks Trend

2012-08-29 12:35:00
David Song, Strategist
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Talking Points

  • Euro: Germany Warns Of ECB Systemic Risk, Remains Capped By 100-Day SMA
  • British Pound: Funding For Lending To ‘Take A While,’ Eyes 1.5900 Figure
  • U.S. Dollar: Fed’s Beige Book On Tap, Jackson Hole Conference In Focus

Euro: Germany Warns Of ECB Systemic Risk, Remains Capped By 100-Day SMA

The Euro slipped to an overnight low of 1.2531 as policy makers in Germany warned that the European Central Bank may become a systemic risk to the financial system, and the ECB may come under increased scrutiny as it looks to expand its balance sheet further. In response, Italian Prime Minister Mario Monti argued that blocking the ECB’s asset purchase program may ‘backfire’ amid the heightening threat for contagion, while central bank President Mario Draghi pledged to ‘act within the limits of its mandate’ as European policy makers continue to express their concerns surrounding the non-standard measure.

Nevertheless, as Catalonia appeals for EUR 5B in aid, the weakening outlook for Spain may push the ECB to carry out its easing cycle throughout the remainder of the year, and we may see the central bank continue to risk its independence as the governments operating under the monetary union become increasingly reliant on monetary support. As the EURUSD remains capped by the 100-Day SMA (1.2593), the pair may continue to consolidate over the remainder of the week, and we will maintain a bearish outlook for the euro-dollar as the downward trend from 2011 remains intact. As the EURUSD continues to carve out a lower top ahead of September, we anticipate to see fresh yearly lows in the exchange rate, but the pair may hold steady going into the Jackson Hole Economic Symposium as market participants weigh the outlook for monetary policy.

British Pound: Funding For Lending To ‘Take A While,’ Eyes 1.5900 Figure

The British Pound bucked the trend as it rallied to a high of 1.5843 and the sterling may continue to track higher over the near-term as former resistance around the 1.5740-50 figure appears to be providing interim support. Meanwhile, Bank of England Markets Director said the Funding for Lending Scheme is ‘designed to support the economy’ as the central bank tries to encourage a stronger recovery, and went onto say that the new initiative ‘will take a while to work through’ the real economy as commercial banks in the U.K. remain reluctant to lend. As the BoE expects the new lending program boosting economic activity, we should see the central bank maintain a wait-and-see approach over the coming months, and the Monetary Policy Committee may sound more upbeat going into the end of the year as the economic recovery gradually gathers pace. As the GBPUSD pares the decline from the previous week, we should see the upward tending channel from July continue to take shape, and the pair looks poised to move back above the 1.5900 figure as the BoE is widely expected to maintain its current policy in September.

U.S. Dollar: Fed’s Beige Book On Tap, Jackson Hole Conference In Focus

The greenback bounced back on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,003, and the reserve currency may track higher during the North American trade as market sentiment tapers off. Nevertheless, as the Fed’s Beige Book comes into focus, the central bank report may highlight an improving outlook for the world’s largest economy, and a positive development should prop up the dollar as it saps expectations for another round of quantitative easing. In turn, we may see the greenback push higher going into the Jackson Hole conference, and the fresh batch of central bank rhetoric should set the tone for September as market participants maintain bets for QE3.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Pending Home Sales (MoM) (JUL)

1.0%

-1.4%

USD

14:00

10:00

Pending Home Sales (YoY) (JUL)

9.9%

8.4%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (AUG 24)

-5412K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (AUG 24)

-962K

USD

14:30

10:30

DOE U.S. Distillate Inventory (AUG 24)

992K

USD

18:00

14:00

Fed's Beige Book

NZD

22:45

18:45

Building Permits (MoM) (JUL)

3.0%

5.7%

--- 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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