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Euro Pares Gain Amid Speculation For Ratings Cut- ECB Under Pressure

Euro Pares Gain Amid Speculation For Ratings Cut- ECB Under Pressure

David Song, Strategist

Talking Points

  • Euro: Moody’s To Review Spain’s Debt Rating, ECB Under Scrutiny
  • British Pound: Holds Range Ahead Of BoE, RSI Threatens Upward Trend

Euro: Moody’s To Review Spain’s Debt Rating, ECB Under Scrutiny

The Euro pared the overnight advance to 1.2958 amid speculation that Moody’s will cut Spain’s credit rating from Baa3, which is just one notch above junk, and the ongoing turmoil in the periphery countries will continue to dampen the appeal of the single currency as the debt crisis continues to drag on the real economy.

In response to Spain’s 2013 budget, the EU said it will conduct a ‘full assessment’ in early November as the region continues to mull over the EUR 100B bank bailout, but the deepening recession in the euro-area may put additional pressure on the European Central Bank as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

Meanwhile, Italian Prime Minister Mario Monti took a shot at the ECB and argued against the conditionality tied to the unlimited bond-buying program, stating that the new initiative should only provide ‘checks so the countries continue to behave in that positive way,’ and we may see the Governing Council continue to strike a dovish tone next week as European policy makers struggle to restore investor confidence.

As market participants turn their attention to the ECB rate decision on tap for October 4, we may see the EURUSD consolidate ahead of the policy meeting, but we will maintain a bearish outlook for the pair as it carves out a lower top in September. Although the 200-Day SMA (1.2822) appears to be holding up as interim support, the weakening outlook for Europe should produce a more meaningful move to the downside, and we may see the euro-dollar come up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, which was former resistance.

British Pound: Holds Range Ahead Of BoE, RSI Threatens Upward Trend

The British Pound bounced back from an overnight low of 1.6181 to maintain the range bound price action carried over from the previous week, and the sterling may continue to track sideways over the near-term as market participants weigh the outlook for monetary policy.

Although the Bank of England meets next week, the central bank is widely expected to maintain its current policy in October, and the rate decision may produce a muted reaction should the Monetary Policy Committee refrain from releasing a policy statement.

However, as BoE officials scale back their forecast for undershooting the 2% target for inflation, we should see the MPC endorse a wait-and-see approach throughout the remainder of the year, and the central bank appears to be slowly moving away from its easing cycle as the U.K. emerges from the double-dip recession. In turn, the shift in the policy outlook may continue to prop up the British Pound, but the pullback from 1.6308 may turn into a larger correction as the relative strength index on the GBPUSD threatens the upward trend from June.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

12:30

8:30

Gross Domestic Product (MoM) (JUL)

0.1%

0.2%

CAD

12:30

8:30

Gross Domestic Product (YoY) (JUL)

2.0%

2.4%

USD

12:30

8:30

Personal Income (AUG)

0.2%

0.3%

USD

12:30

8:30

Personal Spending (AUG)

0.5%

0.4%

USD

12:30

8:30

Personal Consumption Expenditure Deflator (MoM) (AUG)

0.5%

0.0%

USD

12:30

8:30

Personal Consumption Expenditure Deflator (YoY) (AUG)

1.5%

1.3%

USD

12:30

8:30

Personal Consumption Expenditure Core (MoM) (AUG)

0.1%

0.0%

USD

12:30

8:30

Personal Consumption Expenditure Core (YoY) (AUG)

1.6%

1.6%

USD

13:00

9:00

NAPM-Milwaukee (SEP)

42.9

USD

13:45

9:45

Chicago Purchasing Manager (SEP)

53.0

53.0

USD

13:55

9:55

U. of Michigan Confidence (SEP F)

79.0

79.2

CNY

2:30

22:30

HSBC Purchasing Manager Index Manufacturing (SEP)

47.6

--- 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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