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FOREX ANALYSIS: Euro Looks Lower On Debt Crisis, Record-Unemployment

FOREX ANALYSIS: Euro Looks Lower On Debt Crisis, Record-Unemployment

2012-10-26 12:15:00
David Song, Strategist
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Talking Points

  • Euro: Moody’s Sees No ‘Short-Term Resolution,’ Spanish Unemployment Hits 25%
  • British Pound: Outlook Remains Bullish, U.K. Fundamentals To Improve Further

Euro: Moody’s Sees No ‘Short-Term Resolution,’ Spanish Unemployment Hits 25%

The Euro weakened to 1.2881 as Moody’s Investor Services warned that there are no ‘short-term resolution’ in addressing the debt crisis, and the single currency may continue to give back the advance from earlier this year as the rating agency sees another three ‘painful’ years for the euro-area.

As European policy makers struggle to stem the threat for contagion, European Central Bank board member Peter Praet said the Governing Council is ‘operationally ready’ to purchase government debt, but warned that the central bank ‘cannot solve the underlying problems’ that led up to the debt crisis as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

At the same time, former Governing Council member Lorenzo Bini Smaghi said Spain must seek assistance as unemployment climbed to a record-high of 25%, and the ECB may come under increased pressure to ease monetary policy further in order to stem the downside risks for the region. In turn, the central bank may now look to target the benchmark interest rate, and the weakening outlook for the region should continue to push the exchange rate lower as we anticipate the central bank to carry its easing cycle into the following year.

As the relative strength index on the EURUSD fails to maintain the upward trend carried over from July, we should see the double-top formation continue to take shape, and we are looking for a break and a close below the 200-Day SMA (1.2832) for a more meaningful move to the downside.

British Pound: Outlook Remains Bullish, U.K. Fundamentals To Improve Further

The British Pound halted the two-day rally as market participants scaled back their appetite for risk, but we should see the sterling regain its footing in the week ahead as the economic docket is expected to instill an improved outlook for the U.K.

As Britain emerges from the double-dip recession, we should see the Bank of England preserve a wait-and-see approach over the near to medium-term, and the shift in the policy outlook casts a bullish outlook for the sterling as the central bank appears to be scaling back its forecast for undershooting the 2% target for inflation.

As a result, we are still looking for a move back above the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200, and the sterling may continue to outperform over the remainder of the year as the BoE appears to be slowly moving away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:55

9:55

U. of Michigan Confidence (OCT F)

83.0

83.1

CNY

1:30

21:30

Industrial Profits (YTD) (YoY) (SEP)

-3.1%

--- 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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