Talking Points

  • Euro: ECB Lends EUR 530B, EU Summit Takes Center Stage
  • British Pound: BoE Talks Down Speculation For Additional Monetary Support
  • U.S. Dollar: All Eyes On Fed Chairman Bernanke Testimony

Euro: ECB Lends EUR 530B, EU Summit Takes Center Stage

The Euro fell back from an overnight 1.3484 as 800 commercial banks tapped the ECB's second Long Term Refinancing Operation for a total of EUR 529.5B, and the EURUSD may continue to give back the advance from earlier this month as the pair continues to find resistance around the 50.00% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500. In response to the LTRO, Standard and Poor's said that the extraordinary measures have helped to avert a credit crunch, but argued that the 'ECB's actions do not address the underlying structural issues in the banking sector' amid the ongoing turmoil in the financial system.

As the EU Summit comes into focus, the group pledged to take 'all necessary measures' to stimulate growth while addressing the budget deficit, but the meeting may fail to prop up the single currency should European policy makers struggle to meet on common ground. The EU is widely expected to finalize the second bailout for Greece while looking to boost the lending capacity of the European Stability Mechanism, but the group may use this meeting as an opportunity to buy more time as government officials continue to move in their own interest. Indeed, the EURUSD appears to be carving out a top head of March as the relative strength index falls back from a high of 68, and we may see the exchange rate fall back towards the 38.2% Fib around 1.3100 to test for near-term support.

British Pound: BoE Talks Down Speculation For Additional Monetary Support

The British Pound extended the advance from earlier this week following the slew of positive developments coming out of the U.K., and the sterling may continue to track higher over the remainder of the week as the Bank of England talks down speculation for additional monetary support. BoE Governor Mervyn King talked down speculation for a LTRO in Britain as commercial banks across the region remain well capitalized, and pledged to adjust its asset purchase facility accordingly as the central bank expects to see a more robust recovery in 2012. As the GBPUSD finally clears the 200-Day SMA (1.5906), the pair may continue to retrace the decline from the end of October, and we may see the exchange rate make another run at the 23.6% Fib from the 2009 low to high around 1.6250 as the central bank continues to soften its dovish tone for monetary policy.

U.S. Dollar: All Eyes On Fed Chairman Bernanke Testimony

The greenback continued to track lower on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 9,744, and the reserve currency may weaken further during the North American trade should Fed Chairman Ben Bernanke see scope to expand the balance sheet further. Indeed, Mr. Bernanke is scheduled to deliver the semi-annual monetary policy statement in front of the House Financial Services Committee at 15:00 GMT, but we may see the central bank head change his tune give the stickiness in underlying inflation paired with the more robust recovery in the labor market. As the fundamental outlook for the world's largest economy improves, government officials may encourage the Fed to gradually wind down its balance sheet, and less dovish remarks could spur a rebound in the USD as market participants scale back speculation for another round of quantitative easing. Indeed, the testimony may overshadow the Fed's Beige Book, but we expect the survey to highlight a brighter outlook for the U.S. as the economic recovery gathers pace.

--- Written by David Song, Currency Analyst

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