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Forex: Euro Relief Rally Overbought- Pound Eyes 1.6200 Ahead Of BoE

Forex: Euro Relief Rally Overbought- Pound Eyes 1.6200 Ahead Of BoE

David Song, Strategist

Talking Points

  • Euro: Germany Argues Against Bank Supervision, RSI Approaching Overbought
  • British Pound: BoE Calls For More Lending, 1.6200 On Tap

Euro: Germany Argues Against Bank Supervision, RSI Approaching Overbought

The EURUSD climbed to a fresh weekly high of 1.3095 as European policy makers anticipate the new aid package for Greece to have a more lasting impact in addressing the debt crisis, but the single currency remains poised to face additional headwinds over the near to medium-term as the governments operating under the monetary union continue to protect their own interest.

Despite the push for greater integration, it seems as though there’s mixed feelings surrounding plans for a single European banking supervision, and we may see the EU persistently struggle to meet on common ground as the debt crisis continues to dampen the fundamental outlook for the region. Indeed, German Finance Minister Wolfgang Schaeuble argued against the new initiative as ‘it would be very difficult to get an approval from German parliament if you would leave the supervision for all the German banks to European banking supervision,’ and went onto say that ‘nobody believes that any European institution would be capable of supervising 6,000 banks in Europe’ as the EU puts increased pressure on the European Central Bank to address the risks surrounding the region.

Although the ECB is widely expected to maintain its current policy in December, the Governing Council may show a greater willingness to lower the benchmark interest rate further as the deepening recession threatens price stability, and we may see a short-term reversal later this week should President Mario Draghi cast a dovish outlook for monetary policy.

Indeed, the relief rally in the EURUSD appears to be coming to an end as the relative strength index approaches overbought territory, and the lack of momentum to clear the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 may produce a short-term correction in the exchange as the pair appears to be carving a lower top ahead of 2013.

British Pound: BoE Calls For More Lending, 1.6200 On Tap

The British Pound extended the advance from the previous day, with the GBPUSD advancing to a high of 1.6129, and the sterling may continue to retrace the decline from back in September as the Bank of England appears to be slowly moving away from its easing cycle.

Nevertheless, the BoE’s Financial Policy Committee held a rather cautious tone for the U.K. and encouraged commercial banks to ‘expand their balance sheets more quickly to support new lending and the wider economic recovery,’ but we may Governor Mervyn King strike a more neutral tone for monetary policy as inflation is expected to hold above the 2% target over the next two-years.

As sticky price growth dampens the Monetary Policy Committee’s scope to expand the balance sheet further, the shift in the policy outlook should carry the British Pound higher over the near-term, and the BoE interest rate decision may pave the way for another run at the 1.6200 figure – the 23.6% Fib from the 2009 low to high – as the BoE looks to carry its wait-and-see approach into the following year.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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