Talking Points

  • Euro: European Policy Makers Hold Mixed Views For 2012
  • British Pound: Sterling May Take Safe-Haven Role, Range-Bound Prices Ahead
  • U.S. Dollar: Weighed By Risk Appetite, Fundamentals To Play Increased Role In 2012

Euro: European Policy Makers Hold Mixed Views For 2012

The Euro lagged behind its major counterparts on Friday, with the EUR/USD slipping to an overnight low of 1.2903, and the single currency is likely to weaken further in 2012 as the fundamental outlook for the region turns increasingly bleak. Indeed, Euro Group President Jean-Claude Juncker held a cautious tone during an interview with a Luxembourg radio and warned that the economic outlook will 'become more foggy' as the euro-area braces for a 'mild recession.'

In turn, the European Central Bank is widely expected to push the benchmark interest rate below 1.00%, but the Governing Council may have little choice but to further expand its nonstandard measures as the heightening risk for contagion drags on the real economy. According to a report by the ECB, overnight deposits increased to EUR 445.7B, which compares with the record EUR 452B seen earlier this month, and the ongoing turmoil in the financial system instills a bearish outlook for the single currency as European policy makers struggle to restore investor confidence. In contrast, German Finance Minister Wolfgang Schaeuble struck a positive tone for the region and said economic conditions in the euro-area should stabilize over the next 12-months, but we may see a major economic downturn in Europe as the governments operating take extraordinary steps to balance their public finances. As the EUR/USD trades within a downward trending channel, the exchange rate looks poised to weaken further in the week ahead, and we may see the come up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as it searches for support.

British Pound: Sterling May Take Safe-Haven Role, Range-Bound Prices Ahead

The British Pound pared the sharp decline from earlier this week, with the GBP/USD advancing to a high of 1.5521 on Friday, but market participants may treat the sterling as a safe-haven in 2012 as the central bank keeps the benchmark interest rate at the record-low. As Britain remains ahead of the curve in balancing public finances, we've seen increased demands for U.K. debt, and the shift in market sentiment may prop up the sterling as investors scale back their appetite for risk. However, as the region teeters on the brink of another recession, the slowing recovery in the U.K. could dampen the appeal of the British Pound, and we may see the sterling face additional headwinds in the following year as the Bank of England keeps the door open to expand its asset purchase program beyond the GBP 275B target. As this theme continues to develop, we are likely to see the GBP/USD trade within a broad range over the near-term, but the pair may make another run at the 50.0% Fib from the 2009 low to high around 1.5270-1.5300 as market participants see the BoE taking additional steps to shore up the ailing economy.

U.S. Dollar: Weighed By Risk Appetite, Fundamentals To Play Increased Role In 2012

The greenback lost ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back to a low of 9,959, but the reserve currency may face choppy price action during the North American trade as market participation thins ahead of the New Year. As the U.S. equity market pares the decline from the open, the rebound in trader sentiment may gather pace throughout the day, but we should see the dollar appreciate further in the following year as the fundamental outlook for the world's largest economy improves. As the more robust recovery limits the Fed's scope to conduct another large-scale asset program, fundamental developments are likely to play an increased role in driving price action for the USD, and the correlation between the dollar and risk may ultimately breakdown as the central bank softens its dovish tone for monetary policy.

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line Distribution List to dsong@dailyfx.com.

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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

NAPM-Milwaukee (DEC)

58.3

56.7


Currency

GMT

Release

Expected

Actual

Comments

JPY

23:15

Nomura/JMMA Manufacturing Purchasing Manager Index (DEC)

--

50.2

Expands for the eighth time in 2011.

AUD

00:30

Private Sector Credit (MoM) (NOV)

0.3%

0.3%

Increases for the fifth straight month.

AUD

00:30

Private Sector Credit (YoY) (NOV)

3.6%

3.5%

CNY

02:30

HSBC Manufacturing PMI (DEC)

--

48.7

Contracts for the second month.

GBP

07:00

Nationwide House Prices s.a. (MoM) (DEC)

0.0%

-0.2%

Weakens for the fourth time this year.

GBP

07:00

Nationwide House Prices n.s.a. (YoY) (DEC)

1.5%

1.0%

EUR

09:00

Italian Producer Price Index (MoM) (NOV)

0.1%

0.2%

Slowest pace of growth since November 2010.

EUR

09:00

Italian Producer Price Index (YoY) (NOV)

4.4%

4.5.%

GBP

09:30

Bank of England Housing Equity Withdrawal (Pounds) (3Q)

-9.0B

-8.6B

Household paid back the least since 3Q 2010.

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