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Forex: Euro Relief Rally At Risk, Sterling Looks Higher On BoE Policy

Forex: Euro Relief Rally At Risk, Sterling Looks Higher On BoE Policy

2012-11-21 14:20:00
David Song, Currency Strategist
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Talking Points

  • Euro: EU Fails To Deliver Greek Deal, IMF Says More Needs To Be Done
  • British Pound: BoE Votes 8-1 on QE, Curbs Bets For Lower Borrowing Costs
  • U.S. Dollar: Continues To Gain Ground Ahead Of Thanksgiving Holiday

Euro: EU Fails To Deliver Greek Deal, IMF Says More Needs To Be Done

The Euro pared the overnight decline to 1.2735 as European policy makers floated different options to save Greece, but the reactionary approach held by the EU continues to encourage a bearish outlook for the EURUSD as the debt crisis dampens the fundamental outlook for the region.

Indeed, the EU unveiled a EUR 10B bond-buyback plan for Greece, which would be financed through the European Financial Stability Facility, while the group is also looking to suspend Greece’s interest payment on the bailout program through 2020 in an effort to keep the periphery country within the monetary union.

As the EU prepares a bundled aid package to avert a Greek default, International Monetary Fund Managing Director Christine Lagarde argued that ‘a bit more’ needs to be done to find a credible solution for Greece, and the ongoing rift within the troika – the EU, ECB, and IMF – may produce further weakness in the EURUSD as European policy makers struggle to restore investor confidence.

As European policy makers increase their pledge to avoid a credit event in Greece, headlines coming out of the region may keep the single currency afloat over the coming days, but we may see the EURUSD struggle to hold above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the euro-area turns increasingly bleak.

As the short-term rebound in the EURUSD fails to keep the exchange rate above the 20-Day SMA (1.2820), the pair may consolidate going into the holiday trade, and we will maintain our bearish forecast for the euro-dollar as the weakening outlook for the region is expected to put additional pressure on the European Central Bank to ease monetary policy further.

British Pound: BoE Votes 8-1 on QE, Curbs Bets For Lower Borrowing Costs

The British Pound climbed to a fresh weekly high of 1.5948 as the Bank of England (BoE) Minutes sapped bets for additional monetary support, and the rebound from 1.5822 may continue to gather pace over the near to medium-term as the central bank appears to be slowly moving away from its easing cycle.

Although the Monetary Policy Committee voted 8-1 to keep its asset purchase program at GBP 375B, the board argued against a further reduction in the benchmark interest rate, while a growing number of central bank officials turned their attention to the stickiness in price growth as the central bank warned that ‘above-target inflation in the near term increased the chance that any pick-up in productivity would result in higher wage demands.’

As the BoE strikes a more neutral tone for monetary policy, we’re seeing the relatives strength index on the GBPUSD breakout of the downward trend carried over from September, and the technical development encourages a bullish outlook for the GBPUSD as the pair appears to be carving out a higher low in November.

U.S. Dollar: Continues To Gain Ground Ahead Of Thanksgiving Holiday

The greenback continued to gain ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,059, and the reserve currency may track higher ahead of the holiday trade as the developments coming out of the EU meeting fails to generate an improved landscape for risk-taking behavior.

As U.S. traders go offline ahead of the Thanksgiving holiday, the drop in market participation may produce choppy price action over the next 24-hours of trading, but the bullish sentiment surrounding the reserve currency looks poised to gather pace over the remainder of the year as the Federal Reserve adopts an improved outlook for the world’s largest economy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Leading Indicators (OCT)

0.1%

0.6%

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (NOV 16)

1089K

USD

15:30

10:30

DOE U.S. Distillate Inventory (NOV 16)

-2539K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (NOV 16)

-440K

USD

16:30

11:30

|| US to Sell $13 BLn in 10-Year TIPS

NZD

15:00

10:00

Net Migration s.a. (OCT)

0.1%

0.6%

--- 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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