Talking Points

  • Euro: ECB Considers Two-Year Loans, Germany Officials Pessimistic On EU Summit
  • British Pound: U.K. Outlook Weakens Further, Sterling Remains Capped By 20-Day SMA
  • U.S. Dollar: Risk Aversion To Gather Pace, Consumer Credit On Tap

Euro: ECB Considers Two-Year Loans, Germany Officials Pessimistic On EU Summit

The Euro slipped to a low of 1.3353 as government officials in Germany talked down expectations of seeing a positive outcome this week, and the single currency remains poised to face additional headwinds over the next 24-hours of trading as the European Central Bank is widely expected to lower the benchmark interest rate by another 25bp. At the same time, the Governing Council may look to expand its nonstandard measures in light of the ongoing turmoil in the financial system, and we should see the ECB carry its easing cycle into the following year as the fundamental outlook for the euro-area turns increasingly bleak.

Indeed, the ECB said it's considering two-year loans for commercial banks after its three-month dollar tender surged $50.7B this month, while we saw the London Interbank Offered Rate (LIBOR) for three-month dollar loans advance to 0.54000% to mark the highest level since July 2009. As European policy makers struggle to meet on common ground, we are likely to see the governments operating under the single currency become increasingly reliant on monetary support, and the ECB may have little choice but to further expand its nonstandard measures as the debt crisis heightens the risk of seeing a major downturn in Europe. As the EUR/USD makes another failed attempt to push above the 20-Day SMA at 1.3449, the pair should continue to give back the rebound from the end of November, we may see the exchange rate make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as investor confidence deteriorates.

British Pound: U.K. Outlook Weakens Further, Sterling Remains Capped By 20-Day SMA

The British Pound pared the decline from earlier this week to reach a high of 1.5641, but the rebound could be short-lived as the recent data coming out of the U.K. dampens the outlook for future growth. As the region faces an increased risk of a double-dip recession, we are likely to see the Bank of England expand monetary policy further over the coming months, and the sterling may trend lower over the remainder of the year as price action remains capped by the 20-Day SMA at 1.5686. However, as the BoE is widely expected to maintain its current policy in December, we should see the central bank refrain from releasing a statement, and market participants may overlook the rate decision as they wait for the meeting minutes which are due out on December 21. As growth prospects deteriorate, the minutes could highlight an increased willingness to expand the asset purchase program beyond the GBP 275B during the first-quarter of 2012, and expectations for additional monetary support is likely to weigh on the exchange rate, which could ultimately lead the GBP/USD to give back the rebound from 1.5273.

U.S. Dollar: Risk Aversion To Gather Pace, Consumer Credit On Tap

The greenback firmed up against most of its major counterparts on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,883, and the reserve currency may trade higher over the remainder of the week as market participants scale back their appetite for risk. As the U.S. equity market opens lower, the shift away from risk-taking behavior should gather pace throughout the North American trade, and we may see the dollar index continue to retrace the decline from the end of November as the reserve currency benefits from safe-haven flows. Nevertheless, consumer credit in the world's largest economy is expected to increase another $7.000B in October following the $7.386B expansion during the previous month, and the development may help to prop up market sentiment as the data highlights an improved outlook for growth.

--- Written by David Song, Currency Analyst