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Forex: Euro Optimism Hit By Deepening Recession, Pound Looks Higher

Forex: Euro Optimism Hit By Deepening Recession, Pound Looks Higher

David Song, Strategist

Talking Points

  • Euro: France Loses AAA Rating, ECB Warns Of Stagnation- EU Meeting In Focus
  • British Pound: Extends Advance Ahead Of BoE Minutes, RSI Threatens Trend
  • U.S. Dollar: Rebounds Ahead Of Holiday Trade, Bernanke Speech On Tap

Euro: France Loses AAA Rating, ECB Warns Of Stagnation- EU Meeting In Focus

The Euro slipped to 1.2763 after Moody’s Investor Services lowered France’s credit rating to AA1 from AAA, but we’re seeing the EURUSD track higher ahead of the EU meeting as European policy makers increase their efforts to keep Greece within the monetary union.

Indeed, the EU is widely expected to announce a bundle aid package for the periphery country in order to avert a Greek default, but the measure certainly falls short in addressing the debt crisis as the governments operating under the fixed-exchange rate system become increasingly reliant on external support.

Despite the recent efforts to address the debt crisis, European Central Bank (ECB) board member Benoit Coeure argued that the EU should ‘not be fooled’ by the recent improvements in the financial markets, and the Governing Council may have little choice but to further support the ailing economy as the heightening threat for contagion continues to drag on the fundamental outlook for the euro-area.

As the region faces a deepening recession, ECB board member Ewald Nowotny highlighted the heightening risk for stagnation, and the Governing Council may look to target the benchmark interest rate in the coming months as the economic downturn in Europe dampens the outlook for price stability.

As the relative strength index on the EURUSD maintains the downward trend carried over from September, we will preserve our bearish forecast for the euro-dollar, and the pair may continue to threaten the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the EU fails to draw up a credible solution to tackle the debt crisis.

British Pound: Extends Advance Ahead Of BoE Minutes, RSI Threatens Trend

The British Pound continued to gain ground on Tuesday, with the GBPUSD advancing to an overnight high of 1.5935, and the sterling may track higher over the remainder of the week should the Bank of England (BoE) Minutes curb speculation for additional monetary support.

Although the BoE lowered its growth forecast for the U.K., the Monetary Policy Committee (MPC) is likely to sound less dovish this time around as the central bank scales back its forecast for undershooting the 2% target for inflation. Beyond the vote count, we’re very interested to see the dissenting views within the committee, and a growing number of MPC officials may adopt a hawkish tone for monetary policy as the U.K. emerges from the double-dip recession.

As the rebound from 1.5822 gathers pace, the relative strength index on the GBPUSD certainly appears to be threatening the downward trend from back in September, and the sterling may continue to retrace the decline from earlier this year as the BoE appears to be slowly moving away from its easing cycle.

U.S. Dollar: Rebounds Ahead Of Holiday Trade, Bernanke Speech On Tap

The greenback pared the decline from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,029, but the reserve currency may struggle to hold its ground during the North American trade should Fed Chairman Ben Bernanke highlight a greater willingness to ease monetary policy further.

As Operation Twist is scheduled to expire at the end of the year, market participants still see the central bank pushing its open-ended asset purchase program beyond the $40B monthly limit, and the dollar may face a sharp selloff should the central bank talk up speculation for a further expansion in the Fed’s balance sheet.

However, as the world’s largest economy gets on a more sustainable path, the long-term risks for inflation may encourage Chairman Bernanke to strike a more neutral tone for monetary policy, and a less dovish statement should increase the appeal of the USD as market participants scale back bets for additional quantitative easing.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

16:00

11:00

Euro-Area Finace Ministers Hold Meeting On Greece

USD

17:15

12:15

Fed Chairman Ben Bernanke Speaks on U.S. Economy

AUD

23:30

18:30

Westpac Leading Index (MoM) (SEP)

0.5%

--- 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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