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Bearish Euro Formation Takes Shape As EU Summit Disappoints

Bearish Euro Formation Takes Shape As EU Summit Disappoints

2012-10-19 13:15:00
David Song, Strategist
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Talking Points

  • Euro: EU Summit Disappoints, Germany Says Joint Liability ‘Inappropriate’
  • British Pound: U.K. Posts Smallest Deficit Since 2008, 3Q GDP On Horizon
  • U.S. Dollar: To Consolidate Ahead Of FOMC, 3Q GDP– Existing Homes Sales On Tap

Euro: EU Summit Disappoints, Germany Says Joint Liability ‘Inappropriate’

The Euro remains under pressure on Friday, with the EURUSD slipping to a low of 1.3035, and the single currency should track lower throughout the North American trade as European policy makers fail to address the heighten threat for contagion.

Although the EU pledged to carry out the new bank oversight program in 2013, German Chancellor Angela Merkel continued to argue that joint liability in the euro-area remains ‘inappropriate’ for the time being, and we may see the group soften its push for greater fiscal integration as the periphery countries struggle to get their house in order.

As the debt crisis continues to drag on the real economy, Governing Council member Ewald Nowotny claimed that the record-low interest rate remains ‘appropriate,’ but we may see the ECB continue to embark on its easing cycle over the near to medium-term as the euro-area faces a deepening recession.

As the EURUSD remains capped by the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we should see a double-top formation continue to take shape, and the bearish setup may ultimately pan out in the week ahead should the economic docket continue to reflect a dour outlook for the European economy. In turn, we will keep a close eye on the 200-Day SMA (1.2830) as it provides interim support, but a break below the key figure should expose the 23.6% retracement, which lies at 1.2640-50.

British Pound: U.K. Posts Smallest Deficit Since 2008, 3Q GDP On Horizon

The British Pound held a tight range during the European trade even as the U.K. recorded the smallest budget deficit for September since 2008, but we may see the sterling regain its footing in the week ahead as the economic docket is expected to show the region emerging from the double-dip recession.

As the preliminary 3Q GDP report is expected to show the growth rate expanding 0.6%, a rebound in the U.K. economy should increase the appeal of the sterling, and we may see the GBPUSD make another run at the 23.6% Fib from the 2009 low to high around 1.6200 as the fundamental developments coming out of the region continues to dampen speculation for additional monetary support.

As the Bank of England scales back its forecast for undershooting the 2% target for inflation, the shift in the policy outlook reinforces a bullish outlook for the GBPUSD, but we will keep a close eye on the relative strength index as it approaches interim support around the 43 figure.

U.S. Dollar: To Consolidate Ahead Of FOMC, 3Q GDP– Existing Homes Sales On Tap

The greenback extended the advance from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 9,897, and the reserve currency may track higher throughout the North American trade as FX traders continue to scale back their appetite for risk.

Nevertheless, as we’re expecting to see a 2.1% drop in U.S. Existing Home Sales, a dismal print may dampen the appeal of the greenback, and the dollar may struggle to hold its ground as the Federal Reserve keeps the door open to expand its balance sheet further.

However, as we have the FOMC interest rate decision as well as the 3Q GDP report on tap for next week, we may see a fairly muted reaction to the housing report, and the dollar may hold steady going into the days ahead as market participants weigh the outlook for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Existing Home Sales (MoM) (SEP)

-2.1%

7.8%

USD

14:00

10:00

Existing Home Sales (SEP)

4.72M

4.82M

--- 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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