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Forex: Euro Rallies on Less-Dovish ECB, Pound Maintains Bullish Trend

Forex: Euro Rallies on Less-Dovish ECB, Pound Maintains Bullish Trend

David Song, Strategist

Talking Points

  • Euro: ECB Keeps Rate At 0.75%, Gradual Recovery Ahead
  • British Pound: BoE Maintains Current Policy, All Eyes On Meeting Minutes
  • U.S. Dollar: December Rally Overbought, Fed Rhetoric on Tap

Euro: ECB Keeps Rate At 0.75%, Gradual Recovery Ahead

The Euro climbed to a high of 1.3178 as the European Central Bank (ECB) unanimously voted to keep the benchmark interest rate at 0.75%, and the short-term rebound in the EURUSD may gather pace over the remainder of the week as the pair preserves the bullish trend carried over from the previous year.

Although the ECB expects to see a gradual recovery later this year, the central bank warned that the headline reading for inflation will fall below the 2% target in 2013, and we should see the Governing Council continue to carry out its easing cycle over the coming months as the fundamental outlook for the region remains tilted to the downside.

Moreover, President Draghi talked down bets for a rate cut as the central bank head sees inflation expectations ‘broadly balanced’ for the policy horizon, but the deepening recession in the euro-area may prompt the ECB to implement further monetary support as the economic downturn threatens price stability.

As the EURUSD comes off of trendline support, we may see the pair make another run at the 1.3300 figure, but we will keep a close eye on the relative strength index as the oscillator preserves the downward trend from back in September.

British Pound: BoE Maintains Current Policy, All Eyes On Meeting Minutes

The British Pound held with the previous day’s range even as the Bank of England (BoE) kept the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, but we will preserve our bullish outlook for the sterling as the central bank slowly moves away from its easing cycle.

As the BoE refrains from releasing a policy statement, we may see the GBPUSD consolidate ahead of the meeting minutes due out on January 23, but the fresh batch of central bank rhetoric may ultimately trigger another run at the 1.6300 figure as the Monetary Policy Committee sees above-target inflation over the policy horizon. In turn, we may see a growing number of BoE officials start to adopt a more hawkish tone for monetary policy, and the committee may discuss a tentative exit strategy over the coming months as the U.K. economy emerges from the double-dip recession.

As the GBPUSD builds a short-term base around the 1.6000 figure, we should see the upward trending channel from back in June continue to take shape, and the pair may continue to retrace the decline from 2011 as the central bank looks to shift gears this year.

U.S. Dollar: December Rally Overbought, Fed Rhetoric on Tap

The greenback struggled to maintain the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,079, but the reserve currency may regain its footing during the North American trade should we see a growing number of central bank officials drop their dovish tone for monetary policy.

As economic activity gradually gathers pace, we’re seeing the Federal Reserve scale back its willingness to expand the balance sheet further, and the central bank may sound more hawkish going forward as the recovery becomes more broad-based. In turn, the bullish sentiment surrounding the USD should continue to gather pace over the near to medium-term, but the greenback remains poised for a short-term correction as the rebound from December becomes overbought.

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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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