- Euro: ECB Moves Away From Non-Standard Measures, Spain Bond Auction In Focus
- British Pound: BoE Votes 8-1 For APF, Sees Sticky Inflation
- U.S. Dollar: Struggling On Risk Appetite, 9,900 Key For Index
Euro: ECB Moves Away From Non-Standard Measures, Spain Bond Auction In Focus
Heightening fears surrounding the European periphery pushed the EURUSD down to 1.3066 during the overnight trade, and the single currency may come under increased pressure over the next 24-hours of trading should Spain's debt auction disappoint. Indeed, we've seen greater demands for short-term debt in light of the European Central Bank's three-year loan facility, but a dismal 10-Year bond sale could spark a sharp selloff in the exchange rate as heightening finance costs across the region raises the threat for contagion. At the same time, Italian Prime Minister Mario Monti scaled back his pledge to balance public finances as the government raised the 2013 deficit target to 0.5% of GDP from 0.1%, and the weakening outlook for the euro-area may lead the European Central Bank to carry out its easing cycle throughout 2012 as it aims to stem the risk for a prolonged recession.
As the governments operating under the single currency become increasingly reliant on monetary support, European Central Bank board member Jens Weidmann argued that the limits of the bond purchase program have 'become apparent' according to an interview with Reuters, and talked down speculation for another Long Term Refinancing Operation as the non-standard measure fails to stem the risk for contagion. At the same time, International Monetary Fund Managing Director Christine Lagarde said 'there is scope' for lower borrowing costs in the euro-area as the central bank expects to see easing price pressures going into the following year. In turn, we may see ECB President Mario Draghi target the benchmark interest rate as there appears to be a growing rift within the Governing Council, and we will preserve our bearish call on the EURUSD as price action continues to approach the apex of the descending triangle. As the euro-dollar falls back towards support around 1.3000, a break below this key figure would expose the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, and the pair looks poised to track lower throughout the year as the fundamental outlook for the region turns increasingly bleak.
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British Pound: BoE Votes 8-1 For APF, Sees Sticky Inflation
The British Pound made another run at 1.6000 as the Bank of England Minutes dampened speculation for additional monetary support, and the sterling should continue to outperform against its major counterparts as the central bank looks to conclude its easing cycle. Indeed, the Monetary Policy Committee voted 8-1 to maintain the Asset Purchase Facility at GBP 325B as board member Adam Posen scaled back his vote for more quantitative easing, while the central bank continued to soften its dovish tone for monetary policy in light of the stickiness in price growth. As the GBPUSD continues to comes off of the higher low around 1.5800, the upward trending channel should take shape going forward, and we may ultimately see a run at the 23.6% Fib from the 2009 low to high around 1.6250 amid the shift in the policy outlook.
U.S. Dollar: Risk Sentiment To Drive Prices, Index Eyes 10,000
The greenback snapped back on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to 9,971, and the reserve currency looks poised to appreciate further over the next 24-hours of trading as the flight to safety gather pace. As the economic docket remains fairly light for the North American session, risk trends should dictate price action across the major currencies, and the shift away from risk-taking behavior may gather pace going into the middle of the week as fears surrounding the sovereign debt crisis drags on market sentiment. As the USDOLLAR maintains the upward trend from earlier this year, the index looks poised to push back above 10,000 as it carves out a higher floor around 9,900.
--- Written by David Song, Currency Analyst
To contact David, e-mail firstname.lastname@example.org. Follow me on Twitter at @DavidJSong