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Euro Losses To Accelerate Amid Rate Cut Calls, Greek Threat

Euro Losses To Accelerate Amid Rate Cut Calls, Greek Threat

David Song, Strategist

Talking Points

  • Euro: IMF Curbs Outlook For Global Growth, Calls For ECB Rate Cut
  • British Pound: U.K. Outputs Contract, BoE Governor King On Tap
  • U.S. Dollar: Weighed By Risk Appetite, Fed’s Beige Book On Horizon

Euro: IMF Curbs Outlook For Global Growth, Calls For ECB Rate Cut

The Euro pared the overnight decline to 1.2905 as European Central Bank President Mario Draghi continued to reiterate that the unlimited bond-buying program provides a fully effective backstop for the monetary union, but we will maintain a bearish outlook for the EURUSD as the fundamental outlook for the region turns increasingly bleak.

As the euro-area faces a deepening recession, the International Monetary Fund warned that ‘the probability of falling prices is unusually high,’ and the group went onto say that the ECB has the scope to lower the benchmark interest rate further as the central bank outlook ‘may once again prove overly optimistic.’

Meanwhile, Greek Finance Minister Yannis Stournaras warned that the region will need its next bailout payment by November as it struggles to reach a deal with the Troika – the EU, ECB, and IMF – and the growing threat for another debt restructuring in Greece certainly dampens the outlook for the euro as the periphery countries become increasingly reliant on external assistance.

As the debt crisis continues to dampen the outlook for the euro-area, the EURUSD appears to have made a failed run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, and the pullback from 1.3070 may turn into a larger reversal as the pair threatens the upward trend carried over from the end of July.

British Pound: U.K. Outputs Contract, BoE Governor King On Tap

The British Pound snapped back from 1.6000 even as the economic docket showed U.K. business outputs contracting in August, and the sterling may track higher over the next 24-hours of trading should Bank of England Governor Mervyn King soften his dovish tone for monetary policy.

Although the IMF lowered its growth forecast for the U.K., BoE Governor King may sound more upbeat this time around as the U.K. appears to be slowly emerging from the double-dip recession. As the Funding for Lending scheme is expected to boost private sector activity, Mr. King may endorse a wait-and-see approach for the remainder of the year, and we may see the central bank gradually move away from its easing cycle as the stickiness in price growth dampens the risk of undershooting the 2% target for inflation.

As the BoE sticks to the sidelines, the shift in the policy outlook should continue to prop up the sterling, and the rebound in the GBPUSD may gather pace in the days ahead as the relative strength index bounces off of interim support around the 43 figure. In turn, we may see the pound-dollar move back towards the 23.6% Fib from the 2009 low to high around 1.6200 ahead of the BoE Minutes on tap for next week, and the policy statement may fuel a bullish outlook for the Pound should the central bank talk down speculation for more quantitative easing.

U.S. Dollar: Weighed By Risk Appetite, Fed’s Beige Book On Horizon

The greenback is struggling to hold its ground on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 9,902, and the rise in risk-taking behavior may continue to dampen the appeal of reserve currency as market participants move into higher-yielding assists.

As the economic docket remains fairly light for the North American trade, the rebound in risk sentiment may produce further losses for the USD, and the dollar may track lower ahead of the Fed’s Beige Book as Chairman Ben Bernanke keeps the door open to expand the balance sheet further. However, the central bank survey may highlight an improved outlook for the world's largest economy as Fed officials see a limited risk for a double-dip recession, and a positive outcome may instill a bullish outlook for the greenback as market participants scale back bets for additional monetary support.

FX Upcoming










IBD/TIPP Economic Optimism (OCT)






NIESR Gross Domestic Product Estimate (SEP)





BoE Governor Mervyn King Speaks on U.K. Economy




ECB's Weidmann, Praet Speak on Euro Economy




Westpac Consumer Confidence (OCT)





Westpac Consumer Confidence Index (OCT)


--- Written by David Song, Currency Analyst

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

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