- Euro: OECD Cuts Fundamental Forecast, EU Meeting In Focus
- British Pound: U.K. To Face Technical Recession, BoE To Increase Asset Purchases
- U.S. Dollar: Weakness To Be Short-Lived, Choppy Price Action Ahead
Euro: OECD Cuts Fundamental Forecast, EU Meeting In Focus
The Euro advanced to an overnight high of 1.3397 as the EU pledged to discuss the details of leveraging the European Financial Stability Facility at the meeting scheduled for Tuesday, but the group may struggle to meet on common ground as Germany looks to implement more stringent budgetary control over the euro-area. As German Chancellor Angela Merkel pushes to amend the EU treaty, there's limited scope of seeing any major deals being reached over the next 24-hours of trading, and the relief rally could be cut short as the fundamental outlook for Europe deteriorates.
Indeed, the Organization for Economic Cooperation and Development curbed its outlook for global growth as the sovereign debt crisis enters a'new phase,' and encouraged the European Central Bank to implement a broad range of tools to shore up the ailing economy as the region prepares for a 'mild recession.' As the governments operating under the monetary union become increasingly reliant on the central bank's asset purchase program, the ECB may have little choice but to expand its balance sheet further, but we may see the Governing Council move away from its nonstandard measures as the bond purchases come under increased scrutiny. According to Credit Suisse overnight index swaps, market participants see a 65% chance for a 25bp rate cut in December, and we expect the single currency to face additional headwinds over the near-term as the ECB looks poised to carry its easing cycle into the following year. In turn, we may see the EUR/USD continue to give back the advance from 1.3145, and the exchange rate looks poised to make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as European policy makers struggle to stem the risk for contagion.
British Pound: OECD Sees Recession In U.K., BoE To Increase Asset Purchases
The British Pound rallied to 1.5593 following the rise in market sentiment, but we may see the GBP/USD continue to fall back towards the 50.0% Fib from the 2009 low to high around 1.5250 as market participants see the Bank of England taking additional steps to combat the slowing recovery. The OECD sees the BoE increasing its Asset Purchase Facility by GBP 125B in 2012 as the group sees the U.K. teetering on the brink of a technical recession, and the sterling remains poised to weaken further over the near-term as the central bank continues to cast a highly dovish tone for monetary policy. However, we may see the Pound continue to appreciate over the next 24-hours of trading as Chancellor of the Exchequer George Osborne plans to implement new measures to boost private sector credit, and relief rally in the GBP/USD may gather pace throughout the beginning of the week as investors increase their appetite for risk. In turn, the pound-dollar may work its way back towards the 38.2% Fib around 1.5680-1.5700, but the key level may provide resistance as the fundamental outlook for the U.K. turns increasingly bleak.
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--- Written by David Song, Currency Analyst
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