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Euro Threatened By Greek Fears- Bullish Trend At Risk Going Into ECB

Euro Threatened By Greek Fears- Bullish Trend At Risk Going Into ECB

David Song, Strategist

Talking Points

  • Euro: EU Policy Makers Look At Greek Extension, ECB To Unload Debt
  • British Pound: BCC Calls For More Support Amid Stagnant Economy
  • U.S. Dollar: Watching Risk Sentiment Ahead Of FOMC Minutes

Euro: EUPolicy Makers Look At Greek Extension, ECB To Unload Debt

The relief rally in the EURUSD continued to take shape as the exchange rate advanced to a high of 1.2928, but we may see the euro-dollar threaten the upward trend carried over from the end of July amid the heightening risk for a Greek default.

As Greece struggles to secure its next bailout payment, there’s talk that European policy makers will extend the deadline for the region to meet its budget target, while we’re seeing speculation that the European Central Bank may push its Greek debt holdings to the European Stability Mechanism amid the growing threat for another credit event. As the debt crisis continues to dampen the fundamental outlook for the euro-area, the governments operating under the fixed-exchange rate may put increased pressure on the ECB to expand monetary policy further, and the Governing Council may now look to target the benchmark interest rate as the economy faces a deepening recession.

Although the ECB is widely expected to maintain its current policy in October, it appears that a growing number of central bank officials are showing a greater willingness to lower borrowing costs further, and the rebound in the EURUSD may be short-lived as market participants raise bets for a rate cut. As the euro-dollar maintains the range carried over from the previous week, it looks as though the exchange rate will continue to track sideways going into the ECB rate decision, but we may see the pair struggle to hold above the 200-Day SMA at 1.2820 should central bank President Mario Draghi sound increasingly dovish this time around.

British Pound: BCC Calls For More Support Amid Stagnant Economy

The British Pound pared the overnight advance to 1.6168 as the British Chambers of Commerce warned that the ‘economy has been stagnant for too long and urgent measures are needed to enable businesses to drive a sustainable recovery,’ and the GBPUSD may continue to consolidate ahead of the Bank of England interest rate decision as market participants weigh the outlook for monetary policy.

Although there’s lingering bets that the BoE will continue to embark on its easing cycle over the near to medium-term, it seems as though the Monetary Policy Committee is scaling back its forecast for undershooting the 2% target for inflation as the region appears to be emerging from the double dip recession. In turn, we may see Governor Mervyn King soften his dovish tone for monetary policy, and the central bank head may endorse a neutral stance throughout the remainder of the year as the economy gets on a more sustainable path.

As the GBPUSD maintains the range from the previous day, we may see the exchange rate continue to track along the 20-Day SMA at 1.6137, but the pair may resume the bullish trend from back in July should the BoE talk down speculation for additional monetary support.

U.S. Dollar: Watching Risk Sentiment Ahead Of FOMC Minutes

The greenback is losing ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from 9,885, and the rise in risk-taking behavior may continue to press on the reserve currency as risk trends continue to dictate price action in the FX market.

As the economic docket remains fairly light for Tuesday, we should see trader sentiment heavily influence market volatility throughout the day, but the dollar may continue to consolidate ahead of the Federal Open Market Committee Minutes on tap for Thursday we’re seeing a lot of mixed views surrounding the open-ended asset purchase program. As the new measure is expected to have a limited impact in fostering job growth, Fed Chairman Ben Bernanke may come under increased scrutiny, and the committee may slowly bring its easing cycle to an end as the world’s largest economy faces a limited risk of slipping back into recession.

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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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