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Euro To Threaten 1.2650 Amid Deepening Recession, Greek Restructuring

Euro To Threaten 1.2650 Amid Deepening Recession, Greek Restructuring

2012-09-20 13:05:00
David Song, Strategist
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Talking Points

  • Euro: Spain To Tap EUR 40B, Greece To Seek Another Debt Restructuring
  • British Pound: U.K. Retail Sales, Manufacturing Curbs Bets For BoE Support
  • U.S. Dollar: Rallies Ahead Of Fed Rhetoric, Flow Of Funds Report On Tap

Euro: Spain To Tap EUR 40B, Greece To Seek Another Debt Restructuring

The EURUSD tumbled to a fresh weekly low of 1.2928 as Europe’s gauge for manufacturing and service-based slipped to a 39-month low in September, while there’s growing speculation that Greece will ultimately need to restructure its debt once again as the government struggles to secure the next bailout payment.

Nevertheless, European Central Bank board member Benoit Coeure talked down speculation for additional monetary support as ‘there are currently no clear signs of deflation fears,’ while we’re seeing talks that Spain will only seek EUR 40B of the EUR 100B bailout to recapitalize its banking sector as the recent efforts taken by the ECB alleviates the ongoing turmoil in the financial system.

However, we anticipate the Governing Council to carry out its easing cycle throughout the second-half of the year as the region faces a deepening recession, and the central bank may show a greater willingness to implement a zero-interest rate policy (ZIRP) as the non-standard measures only help to buy more time. As the fundamental outlook for the euro-area deteriorates, the pullback from 1.3170 should turn into a larger correction, and the pair may revert back to the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the relative strength index finally falls back from overbought territory.

British Pound: U.K. Retail Sales, Manufacturing Curbs Bets For BoE Support

The British Pound slipped to1.6162 as currency traders scaled back their appetite for risk, but the sterling may continue to outperform against its major counterparts as the fundamental developments coming out of the U.K. dampen speculation for additional monetary support.

Indeed, retail spending fell less than expected in August, while a report by the Confederation of British Industry highlighted a rise in manufacturing, and the brightening outlook for the U.K. should continue to prop up the sterling as the Bank of England softens its dovish tone for monetary policy. In light of the recent remarks by the BoE, it seems as though the central bank will maintain a wait-and-see approach over the medium-term, and we may see the Monetary Policy Committee slowly move away from its easing cycle as region appears to be emerging from the double-dip recession.

Nevertheless, we will be closely watching the relative strength index on the GBPUSD as it falls back from overbought territory, but the pullback from 1.6272 may be short-lived should the oscillator maintain the upward trend carried over from June.

U.S. Dollar: Rallies Ahead Of Fed Rhetoric, Flow Of Funds Report On Tap

The greenback firmed up on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to 9,852, and the reserve currency may appreciate further during the North American trade as risk sentiment falters.

Beyond the Fed’s Flow of Funds report, we have a slew of Fed officials scheduled to speak later today, and the fresh patch of central bank rhetoric may have a larger impact on the USD as market participants weigh the outlook for monetary policy. As the new quantitative easing program comes under increased scrutiny, we may see central bank hawks Narayana Kocherlakota and James Bullard talk down speculation for additional monetary support, but Cleveland Fed President Sandra Pianalto may see scope for more easing amid the persistent weakness in the labor market.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

14:00

10:00

Euro-Zone Consumer Confidence (SEP A)

-24.0

-24.6

USD

14:00

10:00

Philadelphia Fed. (SEP)

-3.3

-7.1

USD

14:00

10:00

Leading Indicators (AUG)

-0.1%

0.4%

USD

16:00

12:00

Federal Reserve Flow of Funds Report

USD

17:30

13:30

Fed's Narayana Kocherlakota Speakson U.S. Economy

USD

21:00

17:00

Fed's Sandra Pianalto Speaks on U.S. Economy

USD

22:30

18:30

Fed's James Bullard Speaks on U.S. Economy

NZD

22:45

18:45

Net Migration s.a. (AUG)

-660

--- 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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