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USD Outlook Hinges On Bernanke, Euro To Falter Should ECB Disappoint

USD Outlook Hinges On Bernanke, Euro To Falter Should ECB Disappoint

2012-08-31 12:45:00
David Song, Strategist

Talking Points

  • U.S. Dollar: Under Pressure Amid QE3 Bets, All Eyes On Fed Chairman Ben Bernanke
  • Euro: Spain Pushes Back Tapping Bailout, ECB Rate Decision May Disappoint
  • British Pound: To Maintain Upward Trend As BoE Preserves Current Policy

U.S. Dollar: Under Pressure Amid QE3 Bets, All Eyes On Fed Chairman Ben Bernanke

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,989, but the reserve currency may regain its footing going into the holiday weekend should Fed Chairman Ben Bernanke talk down speculation for another round of quantitative easing. As the Jackson Hole Economic Symposium takes center stage, the fresh batch of central bank rhetoric should set the tone for September, and we may see Mr. Bernanke sound more upbeat this time around as the world’s largest economy gets on a more sustainable path. Indeed, the chairman may take note of recent pickup in economic activity as the Fed’s Beige Book instills an improved outlook for the U.S., and we would need to see the central bank head soften his dovish tone for monetary policy to see a bullish reaction in the dollar.

Euro: Spain Pushes Back Tapping Bailout, ECB Rate Decision May Disappoint

The EURUSD climbed to a high 1.2625 as Spanish Prime Minister Mariano Rajoy tried to quell fears and announced the government will delay tapping the EUR 100B bank bailout package, but the ongoing turmoil in the monetary union will continue to drag on the exchange rate as the euro-area heads for a prolonged recession. Indeed, Moody’s Investor Services warned that Spain remains on review for a possible credit rating downgrade heading into September, and said further assistance for the region may heighten the medium-term risk for government debt-holders as European policy makers struggle to stem the risk for contagion. As the debt crisis continues to drag on the real economy, we should see the European Central Bank continue to strike a cautious tone at the policy meeting on tap for the following week, but the press conference with President Mario Draghi may disappoint should the central bank head refrain from announcing further details on its asset purchase program. At the same time, we may see a growing rift within the Governing Council as the non-standard measures comes under increased scrutiny, and the central bank may show a greater willingness to implement a range of tools over the coming months in an effort to stem the downside risks for the region. As the EURUSD finally clears the 100-Day SMA (1.2582), the upward trending channel carried over from the previous month may continue to take shape in September, but we may see the ECB rate decision fail to prop up the single currency should the central bank head merely reiterate the statement from the last meeting.

British Pound: To Maintain Upward Trend As BoE Preserves Current Policy

The British Pound advanced to 1.5889 amid the rise in risk sentiment, and the sterling may track higher in the week ahead as the Bank of England is widely expected to maintain its current policy in September. It seems as though the BoE will keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B as the new lending scheme gets under way, and we may see the Monetary Policy Committee refrain from releasing a policy statement as they revert back to a wait-and-see approach. In turn, the upward trending channel from July may continue to gather pace next week, but we will be keeping a close eye on relative strength index as it approaches overbought territory.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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