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Forex: Euro Eyes April Highs On Greek Hopes- Pound Set For New High

Forex: Euro Eyes April Highs On Greek Hopes- Pound Set For New High

2012-12-19 14:10:00
David Song, Strategist
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Talking Points

  • Euro: S&P Raises Greece’s Credit Rating, ECB To Accept Greek Debt As Collateral
  • British Pound: BoE Votes 8-1, Softens Dovish Tone On Above-Target Inflation
  • U.S. Dollar: Build Permits Top Forecast, Index Continues To Carve Base

Euro: S&P Raises Greece’s Credit Rating, ECB To Accept Greek Debt As Collateral

The Euro surged to a fresh monthly high of 1.3307 as Standard and Poor’s raised Greece’s credit rating to B- from Selective Default, while the European Central Bank (ECB) said it will once again accept Greek-guaranteed debt as collateral as the region’s bond-buyback program puts the periphery country on a more sustainable path.

Nevertheless, Spanish Prime Minister Mariano Rajoy reiterated that the region may still have to seek a bailout amid the deepening recession in Europe, and we may see the Governing Council provide further monetary support in the following year as the economic downturn threatens price stability.

Indeed, there’s growing speculation that the ECB will push borrowing costs to a fresh record-low in 2013 as inflation is expected to hold below the 2% target, and we may see a growing number of central bank officials start to look at a zero-interest rate policy in an effort to address the downside risks surrounding the European economy.

Beyond the fundamentals, the EURUSD looks poised for a short-term correction as the relative strength index pushes into overbought territory, but we may see the pair press higher until the oscillator falls back below the 70 figure. As the euro-dollar approaches the April high (1.3379), we may see the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 act as new support, and the headline-driven market may continue to pave the way for further advances as European policy makers continue to talk down the risks surrounding the region.

British Pound: BoE Votes 8-1, Softens Dovish Tone On Above-Target Inflation

The British Pound climbed to 1.6305 as the Bank of England (BoE) voted 8-1 to keep its asset purchase program at GBP 375B, while central bank dove David Miles pushed to expand the balance sheet by another GBP 25B as the U.K. faces a protracted recover.

Although the policy statement warned of an economic contraction in the fourth-quarter, the BoE highlighted that the ‘immediate risks emanating from the euro area seemed less pressing,’ and we should see the Monetary Policy Committee continue to soften its dovish tone for monetary policy asthe Funding for Lending Scheme works its way through the real economy.

As inflation is expected to hold above the 2% target for the ‘next year or so,’ we should see the central bank stick to the sidelines in the following year, and we may see the committee slowly move away from its easing cycle as a growing number of BoE officials look to address the risk for inflation.

With the RSI on the GBPUSD pushing into overbought territory, the pair may face a short-term correction going into the final days of December, but we may see the pound-dollar mark fresh 2012 highs ahead of the New Year as the oscillator maintains the upward trend carried over from the previous month.

U.S. Dollar: Build Permits Top Forecast, Index Continues To Carve Base

The greenback firmed up ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 9,921, and the reserve currency may continue to gain ground over the remainder of the week as the fundamental outlook for the world’s largest economy improves.

Although U.S. Housing Starts fell 3.0% in November, building permits jumped 3.6% amid forecasts for a 0.8% print, and we may continue to see a more broad-based recovery in the U.S. as the Federal Reserve maintains a highly accommodative policy stance. However, we may see the 2013 Federal Open Market Committee (FOMC) scale back its willingness to expand the balance sheet further as the recovery in expected to gather pace in the following year, and we may see a growing number of central bank officials drop their dovish tone for monetary policy as the region gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (DEC 14)

843K

USD

15:30

10:30

DOE U.S. Distillate Inventory (DEC 14)

2986K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (DEC 14)

5000K

NZD

21:45

16:45

Gross Domestic Product (QoQ) (3Q)

0.4%

0.6%

NZD

21:45

16:45

Gross Domestic Product (YoY) (3Q)

2.5%

2.6%

--- 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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