Talking Points

  • Euro: Italy Yields Back Above 7%, ECB Seen As Lender Of Last Resort
  • British Pound: U.K. To Implement GBP 40B Credit-Easing Program
  • U.S. Dollar: Index Maintains Upward Trend, Outlook Remains Bullish

Euro: Italy Yields Back Above 7%, ECB Seen As Lender Of Last Resort

The Euro fell back from an overnight high of 1.3441 as heightening financing costs instilled a weakened outlook for the region, and the single currency remains poised to face additional headwinds over the near-term as market participants see the European Central Bank taking additional steps to shore up the ailing economy. Indeed, Italy auctioned EUR 2.5B of 2022 bonds yielding 7.56%, which compares with the 6.06% offered back in October, and there's increased speculation that the ECB will ultimately have to act as the lender of last resort as policy makers struggle to draw up a concrete solution to contain the debt crisis.

As the heightening risk for contagion dampens the fundamental outlook for the euro-area, investors see increased pressures on the ECB to ramp up its asset purchases, and the central bank may have little choice but to further expand its temporary measures in order to push down yields. However, we may see the Governing Council move away from the nonstandard tools in order to fulfill its one and only mandate to preserve price stability, and ECB President Mario Draghi may resort to another rate cut in December as the region braces for a 'mild recession.' As market participants expect the ECB to expand monetary policy further next month, the outlook for the single currency remains bearish, and we may see the EUR/USD threaten the rebound from 1.3145 should the EU fail to present new ideas in dealing with the debt crisis.

British Pound: U.K. To Implement GBP 40B Credit-Easing Program

The British Pound extended the advance from the previous day to reach a fresh weekly high of 1.5655, and the sterling may continue to recoup the losses from earlier this month as the U.K. government unveils a GBP 500B credit-easing program to shore up the slowing recovery. However, as Chancellor of the Exchequer George Osborne turns increasingly cautious towards the economy, we are likely to see the Bank of England face increased pressures to ease monetary policy further, and it seems as though the MPC will carry its easing cycle into the following year in order to avoid a double-dip recession. As market participants anticipate the BoE to further expand its asset purchase program, speculation for additional monetary support limits the scope of seeing a major reversal in the Pound, and the GBP/USD may trend lower in the days ahead should former support - the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700 - play as new resistance.

U.S. Dollar: Weighed By Risk Appetite, Consumer Confidence On Tap

The greenback struggled to hold its ground during the overnight trade, with the Dow Jones-FXCM U.S Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,900, but the rise in risk appears to be tapering off as optimism surrounding the EU meeting unravels. As U.S. equity futures come off of their highs, we may see market sentiment turn around during the North American trade, and the USDOLLAR may track higher throughout the day as price action climbs back above the 61.8% Fib around 9,947. However, as we're expecting to see a rebound in the Conference Board's Consumer Confidence survey, an above-forecast print could prop up market sentiment, and the development may weigh on the reserve currency as market participants continue to treat the USD as a safe haven.

--- Written by David Song, Currency Analyst