Euro To Face Further Declines Amid Contagion Threats- Greece In Focus

By Roger Baettig | September 24 2012 9:08 AM

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Euro: Greece’s Budget Gap To Top Initial Estimate, Will Need Another EUR 20B
British Pound: RSI Falls Back Below 70, Correction Under Way
U.S. Dollar: Benefits From Risk Aversion, Fed’s John Williams On Tap

Euro: Greece’s Budget Gap To Top Initial Estimate, Will Need Another EUR 20B

The Euro tumbled to a fresh monthly low of 1.2895 as the German Finance Ministry warned that Greece’s budget gap may be larger than initially anticipated, while there’s talk that the Greek government will need another EUR 20B to stay afloat as the region struggles to get its house in order.

At the same time, German officials showed a greater willingness to support Spain beyond the EUR 100B bank bailout package as Michael Meister, the deputy chairman of the Christian Democratic Union, pledged additional support for the struggling nation, but the heightening threat for contagion continues to cast a bearish outlook for the single currency as the debt crisis continues to drag on the real economy.

In response, the European Commission announced that the group is ‘discussing the possibility’ of leveraging the European Stability Mechanism through the European Financial Stability Facility, but the additional measures may only help to buy more time as the governments operating under the single currency struggle to restore investor confidence. As the relative strength index on the EURUSD continues to fall back from overbought territory, we should see the pullback from 1.3170 turn into a larger correction, and we may see the pair threaten the upward trending channel from July as it approaches the 20-Day SMA at 1.2800. A close below the moving average would reinforce our bearish forecast for the euro-dollar, and we will be closely watching the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it searches for interim support.

British Pound: RSI Falls Back Below 70, Correction Under Way

The British Pound slipped to 1.6188 amid the drop in market sentiment, and the sterling may continue to consolidate over the next24-hours of trading as the RSI on the GBPUSD finally dips below 70. After being overbought for the last two-weeks, it looks as though the sterling is finally turning around, and we should see a larger correction in the exchange rate as the pair struggles to hold above the 1.6300 figure yet again.

However, as the oscillator maintains the upward trend from June, we may see the pound preserve the narrow range from the previous week before making another run to the upside, and the sterling may continue to outperform against its major counterparts as the Bank of England scales back its dovish tone for monetary policy. In turn, we will be keeping a close eye on the RSI over the coming days, but risk trends may heavily influence the GBPUSD during the final week of September as the economic docket for the U.K. remains fairly light.

U.S. Dollar: Benefits From Risk Aversion, Fed’s John Williams On Tap

The greenback regained its footing on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to 9,850, and the reserve currency may continue to track higher during the North American trade as risk sentiment falters.

Although the Dallas Fed Manufacturing index is expected to show outputs contracting at a slower pace in September, San Fransico Fed President John Williams, who also serves on the FOMC this year, is scheduled to speak later today, and the fresh batch of central bank rhetoric may sway the dollar as market participants weigh the outlook for monetary policy. As the FOMC embarks on its new quantitative easing program, Mr. Williams may strike a more balanced tone for the economy, but the central bank official may see scope to expand policy further amid the persistent weakness in the labor market.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:30

10:30

Dallas Fed Manufacturing Activity Index (SEP)

-1.4