Talking Points

  • Euro: EU Pledges To Meet IMF Deadline, ECB Argues Against More Asset Purchases
  • British Pound: BoE Sees Greater Risk For Deflation Ahead Of Meeting Minutes
  • U.S. Dollar: Weighed By Risk Appetite, All Eyes On Europe

Euro: EU Pledges To Meet IMF Deadline, ECB Argues Against More Asset Purchases

The Euro bounced back from an overnight low of 1.2982 on hopes that the EU will nail out the details for a EUR 200B credit line with the International Monetary Fund, but the relief rally may taper off should European policy makers struggle to meet on common ground. So far, Poland announced it will contribute around EUR 6B, with Denmark adding EUR 5.4B, but much more needs to be done to see the rebound gather pace as the European Central Bank continues to talk down speculation for a large-scale asset purchase program.

Indeed, ECB President Mario Draghi pledged to 'act in accordance' with its one and only mandate as the central bank prepares for its three-year loan auction on tap for tomorrow, and it seems as though the central bank head will continue to target the benchmark interest rate in 2012 as the asset purchase program sparks a growing rift within the Governing Council. At the same time, ECB board member Christian Noyer argued that a large-scale asset purchase program is well beyond the central bank's mandate while speaking in Paris, and it seems as though the central bank will push borrowing costs below 1.00% in the following year as the region braces for a 'mild recession.' As the fundamental outlook for the euro-area deteriorates, the relief rally in the EUR/USD is likely to be short-lived, and the exchange rate looks poised to weaken further over the remainder of the year as it maintains the downward trending channel from the end of October. In turn, it seems as though the EUR/USD will continue to give back the rebound from back in January (1.2872), and the bearish sentiment underlining the single currency may gather pace in the following year as the region faces an increased risk of a major economic downturn in 2012.

British Pound: BoE Sees Greater Risk For Deflation Ahead Of Meeting Minutes

The British Pound pared the overnight decline to 1.5464 following the rebound in market sentiment, but the sterling may come under pressure this week should the Bank of England show an increased willingness to expand monetary policy further in the following year. The BoE minutes on tap for Wednesday could highlight a dour outlook for the U.K., and the central bank may see scope to increase its asset purchase program beyond the GBP 275B target as market participants see an increased risk of undershooting the 2% target for inflation. Indeed, BoE Markets Director Paul Fisher saw a growing risk for deflation in light of the slowing recovery in the U.K., and went onto say that price developments will dictate monetary policy as the central bank aims to curb the downside risks for the region. As the BoE stands ready to ease policy further, expectations for additional monetary stimulus is likely to drive the sterling lower, and we may finally see the GBP/USD threaten the rebound from 1.5270 as the fundamental outlook for Britain falters.

U.S. Dollar: Weighed By Risk Appetite, All Eyes On Europe

The greenback struggled to hold its ground overnight, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 10,070, and the reserve currency may trade heavy throughout the North American trade as the rise in risk appetite gathers pace. As the economic docket remains fairly light for Monday, we should see market sentiment dictate price action across the major currencies, but the developments coming out of euro-area may rattle investor confidence should we see European policy makers turn increasingly cautious towards the economy. Indeed, talks on the IMF credit line will certainly take center stage over the next 24-hours of trading, but we may see market sentiment deteriorate as the EU struggles to meet on common ground. In turn, the pullback in the USD is likely to be short-lived, and we still see the reserve currency gaining ground throughout the remainder of the year as the fundamental outlook for the world's largest economy improves.

--- Written by David Song, Currency Analyst