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Forex: Euro Remains At Risk On Greece, German Outlook Deteriorates

Forex: Euro Remains At Risk On Greece, German Outlook Deteriorates

David Song, Strategist

Talking Points

  • Euro: Greece To Require Aid Beyond 2014, Banking Union Fails To Solve Crisis
  • British Pound: BoE Keeps Door Open For More QE, But ‘Guardedly Optimistic’
  • U.S. Dollar: Halts Three-Day Rally, U.S. Existing Home Sales On Tap

Euro: Greece To Require Aid Beyond 2014, Banking Union Fails To Solve Crisis

The Euro tagged an overnight high of 1.2786 as the EU pledged to reach a short-term agreement on Greece, but the relief rally is likely to be short-lived as European policy makers maintain a reactionary approach in addressing the debt crisis.

Headlines coming out ahead of the EU meeting may prop up the EUR/USD over the next 24-hours of trading, but the Troika may call for further action in Europe as International Monetary Fund Managing Director Christine Lagarde pledges to defend the group’s credibility.

Indeed, Germany policy makers said another Greece debt restricting is ‘inconceivable’ as European Central Bank (ECB) board member Joerg Asmussen, who served as the deputy finance minister in Germany, warned that the periphery country may need external assistance beyond 2014, while Bundesbank President Jens Weidmann argued that a banking union is not enough to solve the debt crisis as the governments operating under the fixed exchange rate struggle to get their house in order.

At the same time, the Bundesbank said Germany may fail to deliver a balanced budget by 2016 as the euro-area faces a deepening recession, and the weakening outlook for the region is likely to produce further losses in the EUR/USD as we anticipate the ECB to carry its easing cycle into the following year. As the EUR/USD preserves the narrow range carried over from the end of the previous week, the lack of momentum to push back above the 200-Day SMA (1.2805) may ultimately produce a lower top in the exchange rate, and we may see the pair struggle to hold above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the EU fails to present a credible solution to address the debt crisis.

British Pound: BoE Keeps Door Open For More QE, But ‘Guardedly Optimistic’

The British Pound extended, the rebound from the previous week, with the GBP/USD climbing to a high of 1.5922 on Monday, and the sterling may continue to retrace the decline carried over from the previous month as the Bank of England (BoE) looks to carry its wait-and-see approach into 2013.

Although BoE board member David Miles struck a rather dovish tone for monetary policy, the policy maker said the Funding for Lending scheme ‘will have some positive impact as we go into next year,’ and went onto say that he’s ‘guardedly optimistic’ towards the economy as the U.K. emerges from the double-dip recession.

As the relatives strength index on the GBP/USD appears to be threatening the downward trend carried over from September, the rebound from 1.5822 looks poised to gather pace over the coming days, but we will need to see the pair make another run at the 1.6300 to see the bullish breakout in the exchange rate as it maintains the downward trend carried over from 2011.

U.S. Dollar: Halts Three-Day Rally, U.S. Existing Home Sales On Tap

The greenback struggled to hold its ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,015, and hopes surrounding the EU meeting may produce further weakness in the reserve currency as market participants increase their appetite for risk.

At the same time, the economic docket may also drag on the dollar as U.S. Existing Home Sales is projected to contract another 0.1% in October, and the reserve currency may continue to consolidate ahead of the holiday weekend as global investors maintain bets of seeing the Fed expanding its balance sheet further at the December 12 meeting.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

NAHB Housing Market Index (NOV)

41

41

USD

15:00

10:00

Existing Home Sales (OCT)

4.75M

4.75M

USD

15:00

10:00

Existing Home Sales (MoM) (OCT)

-0.1%

-1.7%

AUD

23:00

18:00

Conference Board Leading Index (SEP)

-0.8%

--- 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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