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Euro Rally Lacks Conviction Amid Dovish ECB- Pound Eyes Fresh Highs

Euro Rally Lacks Conviction Amid Dovish ECB- Pound Eyes Fresh Highs

David Song, Strategist

Talking Points

  • Euro: ECB Keeps Rate At 0.75%, Draghi Endorses Wait-And-See Approach
  • British Pound: Eyes 23.6% Fib As BoE Preserves Current Policy
  • U.S. Dollar: Struggles Ahead Of FOMC Minutes, NFPs To Pick Up

Euro: ECB Keeps Rate At 0.75%, Draghi Endorses Wait-And-See Approach

The Euro broke out of its narrow range and advanced to 1.2994 as the European Central Bank held the benchmark interest rate at 0.75%, but the single currency may struggle to maintain the short-term rally as fundamental outlook for the region remains tilted to the downside.

Indeed, ECB President Mario Draghi continued to talk up the unlimited bond-buying program, stating that the Governing Council has provided a fully effective backstop for the ailing economy, and argued against restructuring Greece’s debt even as the periphery country fails to secure its next bailout payment. At the same time, Mr. Draghi reiterated that the inflation remains ‘broadly balanced’ despite the recent uptick in the consumer price index, and went onto say that the committee did not discuss a potential interest rate cut at the meeting as the central bank reverts back to a wait-and-see approach.

However, as the euro-area faces a deepening recession, a growing number of ECB officials may show a greater willingness to lower the interest rate further, and we should see the Governing Council continue to embark on its easing cycle as the debt crisis continues to dampen the outlook for the real economy. As the EURUSD struggles to push back above the 1.3000 figure, we may see the exchange rate continue to consolidate ahead of the highly anticipated Non-Farm Payrolls report on tap for Friday, and we may see the pair move back towards the 200-Day SMA at 1.2820 as market sentiment appears to be tapering off going into the end of the week.

British Pound: Eyes 23.6% Fib As BoE Preserves Current Policy

The British Pound climbed to a 1.6156 as the Bank of England maintained its current policy in October, and the sterling may continue to retrace the pullback from 1.6308 as the central bank slowly moves away from its easing cycle.

As the BoE refrains from releasing a policy statement, we may see the GBPUSD consolidate ahead of the BoE Minutes on tap for October 17, but the fresh batch of central bank rhetoric may instill a bullish outlook for the British Pound as the Monetary Policy Committee starts to scale back its forecast for undershooting the 2% target for inflation. In turn, the statement may reveal a growing rift within the MPC as it central bank is expected to conclude the additional GBP 50B in quantitative easing by November, and a growing number of BoE officials may sound more hawkish this time around as the U.K. appears to be emerging from the double-dip recession.

As the GBPUSD comes off of former trendline resistance, we may see the pair make another run at the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200, and a shift in the policy outlook may pave the way for fresh yearly highs in the exchange rate as the BoE brings its easing cycle to an end.

U.S. Dollar: Struggles Ahead Of FOMC Minutes, NFPs To Pick Up

The greenback is struggling to hold its ground ahead of the FOMC Minutes, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,891, and the reserve currency may weaken further during the North American trade as market participants increase their appetite for risk.

As the Fed’s open-ended asset purchase program gets under way, we should see the central bank strike a more balanced tone for monetary policy, but the committee may keep the door open to expand its balance sheet further as it aims to encourage a stronger recovery. Nevertheless, the Fed may sound more upbeat this time around as the non-standard measure is expected to encourage private sector activity, but the FOMC may face increased criticism as it pushes into uncharted territory.

Indeed, a less dovish tone from the Fed should increase the appeal of the USD, and the dollar may continue to track higher over the remainder of the week as the employment report is anticipated to show job growth picking up in September.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

18:00

14:00

Federal Open Market Committee Meeting Minutes

AUD

23:30

19:30

AiG Performance of Construction Index (SEP)

32.2

--- 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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