Talking Points

  • Euro: EU Meeting In Focus, Greece PSI Deal On Tap
  • British Pound: Struggles To Push Above 50-Day SMA, All Eyes On BoE Minutes
  • U.S. Dollar: Index Comes Up Against Support, To Consolidate Ahead Of FOMC

Euro: EU Meeting In Focus, Greece PSI Deal On Tap

The EUR/USD rallied to an overnight high of1.3031 as finance ministers across the euro-area increased their pledge to address the sovereign debt crisis, but the renewed efforts to stem the risk for contagion may be too little too late as the fundamental outlook for the region turns increasingly bleak. Indeed, market participants anticipate the EU to draw up a long-term solution to balance the ballooning deficit across the monetary union, while there've been reports that Greece has reached a tentative deal with private investors as the government tries to secure its second bailout package ahead of the EUR 14.5B debt payment due on March 20.

However, as European policy makers act in their own interest, the developments coming out of the EU meeting may fall short of market expectations, and we maintain a bearish outlook for the single currency as the fundamental outlook for the region turns increasingly bleak. Indeed, the international Monetary Fund encouraged the European Central Bank to increase monetary support as the slowing recovery dampens the outlook for inflation, and the Governing Council may extend its easing cycle throughout 2012 as the region faces an increased risk for a major economic downturn this year. As the EUR/USD comes up against the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, the near-term correction could be coming to an end, and we expect to see single currency to face additional headwinds this week as the heightening risk for contagion continues to bear down on investor confidence. Should the 38.2% Fib hold up as near-term resistance, we should get an opportunity to play the euro-dollar back to the downside, and the pair may work its way back towards the 23.6% Fib around 1.2630-50 as it maintains the range from the beginning of the year.

British Pound: Struggles To Push Above 50-Day SMA, All Eyes On BoE Minutes

The British Pound bounced back from an overnight low of 1.5516 amid the rise in market sentiment, but the sterling may struggle to hold its ground this week as we anticipate the Bank of England policy meeting minutes to talk up speculation for additional monetary support. As the U.K. teeters on the brink of a double-dip recession, the BoE is expected to strike a dovish tone for future policy, and the Monetary Policy Committee may see scope to expand the Asset Purchase Facility beyond the GBP 275B target as central bank officials see an increased risk of undershooting the 2% target for inflation. As the GBP/USD struggles to push back above the 50-Day SMA at 1.5574, the pair appears to have carved out a lower high just below 1.5600, and

U.S. Dollar: Index Comes Up Against Support, To Consolidate Ahead Of FOMC

The greenback came under pressure on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tumbling to a low of 9,841, but we may see the reserve currency regain its footing during the North American trade as the rise in risk-taking behavior tapers off. As the U.S. equity market opens lower, it seems as though we will see market sentiment waver over the next 24-hours of trading, and we should see a near-term correction in the greenback as it comes up against support. As the USDOLLAR continues to trade above the 50.0% Fib around 9,828, the USD looks poised to pare the sharp decline from the previous week, but we may see the reserve currency hold a narrow range going into the middle of the week as the FOMC is scheduled to release their interest rate projection at the policy meeting on Wednesday. Nevertheless, as we expect the Fed to soften its dovish tone for monetary policy, the developments coming out of the rate decision could instill a bullish outlook for the USD, and the reserve currency looks poised to appreciate further over the near-term as market participants scale back speculation for another large-scale asset purchase program.

--- Written by David Song, Currency Analyst