Euro To Consolidate Ahead Of ESM Vote, Germany Endorses ECB Plan

 
on September 11 2012 10:32 AM

Talking Points

  • Euro: Germany To Rule on ESM, Endorses ECB's Bond Buying Program
  • British Pound: BoE To Maintain Inflation Target, RSI Approaches Overbought

Euro: Germany To Rule on ESM, Endorses ECB's Bond Buying Program

The Euro rallied to an overnight high of 1.2817 as Germany's Constitutional Court reassured that it will rule on the European Stability Mechanism on September 12, while Finance Minister Wolfgang Schaeuble warned of the slowing recovery in Europe's largest economy as the debt crisis continued to dampen the outlook for the region. In turn, Germany's Economy Ministry endorsed the European Central Bank's bond-buying program as the non-standard measure is expected to boost short-term liquidity across the euro-area, but the new initiative will only help to buy more time as the governments operating under the monetary union struggle to get their house in order.

Indeed, market participants are expecting to hear a major announcement at the October 4 meeting as ECB President Mario Draghi continues to endorse an open-ended asset purchase program, but the central bank head may come under increased criticism as the Governing Council puts its independence on the line. As the EURUSD struggles to push above the 200-Day SMA (1.2832), we should see the pair consolidate going into ESM ruling, and the euro-dollar appears to be carving out a near-term top this week as the relative strength index falls back from overbought territory. In turn, we may see the EURUSD fall back towards former resistance around the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, but the single currency may face additional headwinds over the near-term as the economic docket continues to show a deepening recession in Europe.

British Pound: BoE To Maintain Inflation Target, RSI Approaches Overbought

The British Pound climbed to a fresh monthly high of 1.6036 as market participants increased their appetite for risk, but the short-term rally appears to be overbought as the relative strength index on the GBPUSD flirts with overbought territory. Meanwhile, Bank of England board member David Miles argued that the central bank has not given up on its inflation target even as the U.K. remains in a technical recession, and argued that quantitative easing has helped to achieve its price growth target as it helps to boost demands. Nevertheless, the BoE Minutes due out on September 19 may sound more upbeat this time around as the new lending scheme is expected to foster a stronger recovery, and the Monetary Policy Committee may endorse a wait-and-see approach throughout the remainder of the year as growth and inflation gradually picks up. Although the GBPUSD looks poised for a pullback, we may see the sterling appreciate further as the shorter-term moving averages (10, 20 and 50-Day) start to break away from one another, and we may see the upward trending channel from earlier this year continue to take shape as the developments coming out of the U.K. dampens the scope for more easing.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

12:30

8:30

Trade Balance (JUL)

-$44.2B

-$42.9B

USD

14:00

10:00

IBD/TIPP Economic Optimism (SEP)

45.6

EUR

16:00

12:00

ECB's Joerg Asmussen Speaks on Debt Crisis

GBP

17:15

13:15

BoE's David Miles Speaks on U.K. Economy

--- 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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