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Euro Weighed By IMF Warning Shots- Sterling Eyes 1.6200 On BoE Policy

Euro Weighed By IMF Warning Shots- Sterling Eyes 1.6200 On BoE Policy

2012-10-10 13:15:00
David Song, Strategist
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Talking Points

  • Euro: IMF Continues To Fire Warning Shots, ECB To Utilize Balance Sheet
  • British Pound: BoE Softens Dovish Tone, Sees Improved Outlook For 2013
  • U.S. Dollar: Fed’s Beige Book To Highlight Stronger Recovery, Curb Stimulus Bets

Euro: IMF Continues To Fire Warning Shots, ECB To Utilize Balance Sheet

The Euro bounced back from an overnight low of 1.2834 as European Central Bank Vice President Vitor Constancio argued against the International Monetary Fund and said that the ECB’s ‘internal analysis doesn’t show’ a threat for deflation, while board member Jose Manuel Gonzalez-Paramo claimed that ‘there’s nothing that prevents the ECB from executing some QE-type’ program should the central bank struggle to achieve its one and only mandate to preserve price stability.

At the same time, Governing Council member Christian Noyer talked down speculation for a rate cut as the Governing Council looks to ‘fix the transmission problem,’ but went onto say that ‘there would not be another (debt) restructuring in the euro zone’ amid the growing threat for a Greek default.

Nevertheless, the IMF continued to fire warning shots and warned that ‘intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops,’ and went onto say that commercial banks in Europe may need to deleverage as much as $4.5T in assets ‘unless confidence in the euro area is restored.’

As the EURUSD holds above the 200-Day SMA (1.2820), we may see the pair continue to consolidate ahead of the G-7 meeting in Tokyo, but we will maintain a bearish outlook for the euro-dollar as it fails to maintain the upward trend carried over from the end of July. In turn, we should also see the relative strength index on the EURUSD break the series of higher highs paired with higher lows, and we should see the exchange rate fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 once the 200-Day SMA gives way.

British Pound: BoE Softens Dovish Tone, Sees Improved Outlook For 2013

The British Pound climbed to 1.6026 as market participants increased their appetite for risk, and we may see the sterling outperform against its major counterparts as the Bank of England scales back its dovish tone for monetary policy.

Indeed, Bank of England Governor Mervyn King argued that it may be ‘sensible’ to overshoot the 2% target for inflation even though the Monetary Policy Committee continues to operate under the dual mandate to ensure price stability while fostering full employment, and it seems as though the central bank is scaling back its forecast for undershooting the price growth target as the U.K. appears to be emerging from the double-dip recession.

In addition, BoE member Paul Fisher struck an improved outlook for 2013 as he expects a pickup in real income growth to ‘boost consumption,’ and we may see the MPC slowly move away from its easing cycle as the recovery gradually gathers pace.

As the relative strength index on the GBPUSD continues to find interim support around the 43 figure, the overnight rebound in the exchange rate may get carried into the end of the week, and the pair may make another run at the 23.6% Fib from the 2009 low to high around 1.6200 as the interest rate outlook improves.

U.S. Dollar: Fed’s Beige Book To Highlight Stronger Recovery, Curb Stimulus Bets

The greenback is giving back the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,918, but the bearish sentiment surrounding the reserve currency may continue to taper off should the Fed’s Beige Book dampen speculation for additional monetary support.

Indeed, the Fed survey may highlight an improved outlook across the 12-districts as the world’s largest economy gets on a more sustainable path, and the regional banks may endorse a wait-and-see approach over the remainder of the year as the region faces a limited risk for a double-dip recession. In turn, the dollar may continue to retrace the sharp decline from the previous month, and the Fed may look to soften its dovish tone for monetary policy as growth and inflation picks up.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Wholesale Inventories (AUG)

0.4%

0.7%

USD

18:00

14:00

Fed Publishes Beige Book

USD

18:45

14:45

Fed's Narayana Kocherlakota Speaks on U.S. Economy

USD

20:30

16:30

Fed's Daniel Tarullo Speaks on Financial Stability

USD

20:45

16:45

Fed's Richard Fisher Speaks on U.S. Economy

NZD

21:45

17:45

Food Prices (MoM) (SEP)

0.1%

NZD

22:30

18:30

Business NZ Performance of Manufacturing Index (SEP)

47.2

--- 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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