Talking Points

  • Euro: ECB Keeps Rate On Hold, Defends Long-Term Refinancing Operation
  • British Pound: BoE Maintains Current Policy, Sideways Price Action Ahead

Euro: ECB Keeps Rate On Hold, Defends Long-Term Refinancing Operation

The Euro fell back from an overnight high of 1.2777 as the European Central Bank held a cautious outlook for the region, and the single currency may continue to lose ground during the North American trade as the Governing Council keeps the door open to expand monetary policy further. Although the ECB kept the benchmark interest rate at 1.00%, President Mario Draghi continued to argue against additional asset purchases, and it seems as though the central bank head will continue to target the key lending rate in 2012 as the nonstandard measures come under increased scrutiny.

However, Mr. Draghi defended the central banks Long-Term Refinancing Operation, saying that the effort has been an 'effective policy measure, and it seems as though the ECB will continue to shore up the banking sector as the region braces for a 'mild recession.' The recent comments suggest that the Governing Council will stick to the sidelines during the first-quarter of 2012, but we may see the central bank lay the ground work for a zero interest rate policy as the fundamental outlook for the euro-area remains clouded with high uncertainty. As the EUR/USD maintains the downward trending channel from back in October, the near-term correction should taper off in the coming days, and we anticipate the 23.6% Fibonacci retracement from the 2009 high to the 2010 low (1.2630-50) to give way as the central bank maintains a fairly dovish tone for future policy.

British Pound: BoE Maintains Current Policy, Sideways Price Action Ahead

The British Pound bounced back from an overnight low of 1.5278 as market participants increased their appetite for risk, and the GBP/USD may continue to retrace the decline from earlier this month as the pair continues to find support around the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270-1.5300. As the Bank of England keeps the benchmark interest rate at 0.50% and maintains its asset purchase program at GBP 275B, we expect the pound-dollar to trade sideways ahead of the meeting minutes due out on January 25, but the sterling may face additional headwinds over the near-term as the fundamental outlook for the U.K. deteriorates. In turn, we expect the policy statement to hint at additional monetary support, and dovish comments from the BoE could push the GBP/USD back down towards the 50.0% Fib as the fundamental outlook for the U.K. turns increasingly bleak.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong