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Forex: Euro Remains Bearish Below 1.3000-  Spain To Trigger OMT

Forex: Euro Remains Bearish Below 1.3000- Spain To Trigger OMT

2012-11-26 14:15:00
David Song, Currency Strategist

Talking Points

  • Euro: EU Opposes Greece Writedown, ECB Sees Spain Triggering OMT
  • British Pound: BoE’s Miles Maintains Dovish Tone Despite Above-Target Inflation
  • U.S. Dollar: Index Holds Tight Range, Dallas Fed Index On Tap

Euro: EU Opposes Greece Writedown, ECB Sees Spain Triggering OMT

The Euro gave back the overnight advance to 1.2983 even as the EU talked down speculation for a writedown on Greek debt, and the single currency may face additional headwinds over the near-term as European policy makers struggle to stem the heightening threat for contagion.

Although, European Central Bank (ECB) Vice President Vitor Constancio sees the EU reaching ‘an agreement to address the Greek situation,’ Mr. Constancio held a cautious outlook for the monetary union and expects Spain to trigger the Outright Monetary Transactions (OMT) as the region struggles to get its house in order. At the same time, ECB board member Ewald Nowotny argued that ‘there are no quick fixes’ for Europe as the EU maintains a reactionary approach in addressing the debt crisis, and we are likely to see the Governing Council take additional steps to shore up ailing economy as the governments operating under the single currency become increasingly reliant on central bank support.

Nevertheless, as European policy makers pledge to ‘quickly’ implement a short-term solution for Greece, headlines coming out of the EU meeting may prop up the single currency over the next 24-hours of trading, and the EURUSD may make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the relative strength indexbreaks out of the downward trend carried over from back in September. However, as the euro-dollarstruggles to trade back above the 1.3000 figure, the pair could be carving out a lower top ahead of December as the RSI approaches overbought territory, and the threat for contagion may continue to dampen the appeal of the single currency as the debt crisis pushes the region into a deepening recession.

British Pound: BoE’s Miles Maintains Dovish Tone Despite Above-Target Inflation

The British Pound slipped to 1.5998 as market participants scaled back their appetite for risk, but the sterling may continue to retrace the sharp decline from the previous month as the Bank of England (BoE) appears to be dropping its dovish tone for monetary policy.

BoE dove David Miles continued to argue for a further expansion in the central bank’s balance sheet as the U.K. faces ‘very weak growth,’ but we may see the Monetary Policy Committee (MPC) preserve its neutral policy stance going into 2013 as the headline reading for inflation is expected to hold above the 2% target over the next two-years.

As the preliminary 3Q GDP report is expected to show the U.K. emerging from the double-dip recession, a slew of positive developments should strengthen the rebound from 1.5822, and the shift in the policy outlook may carry the GBPUSD back towards the 1.6300 figure as the central bank appears to be slowly moving away from its easing cycle.

U.S. Dollar: Index Holds Tight Range, Dallas Fed Index On Tap

The greenback held a narrow range on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the decline to 9,972, and we may see the reserve currency track higher during the North American trade as the economic docket is expected to highlight an improved outlook for the U.S.

As U.S. traders return from the holiday weekend, the rise in market participation may spark increased volatility across the major currencies, and we may see the bullish sentiment surrounding the dollar gather pace going into December as a growing number of Fed officials take note of the more broad-based recovery. In turn, it seems as though the FOMC will carry its wait-and-see approach into 2013, and we may see the central bank start to discuss a tentative exit strategy next year as the world’s largest economy gets on a more sustainable path.

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--- 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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