Talking Points

  • Euro: Mario Monti To Also Serve As Finance Minister, Italy Yields Hold Above 7%
  • British Pound: BoE Curbs Outlook, Pledges More QE
  • U.S. Dollar: Inflation Slows More-Than-Expected, Risk Aversion To Gather Pace

Euro: Mario Monti To Also Serve As Finance Minister, Italy Yields Above 7%

The Euro bounced back from an overnight low of 1.3427 as European Commission President Jose Barroso pushed for increased economic governance 'what will be important to restore confidence,' and pledged to tackle these issues next month according to a response written to the European Parliament. In addition, former EU Commissioner Mario Monti announced that he will also serve as Italy's finance minister while leading the new government, but it seems as though market participants remain skeptical of the political shift in the euro-area as the yield tied to the region's 10-Year debt pushes back above 7%.

Indeed, we saw the European Central Bank participate in the bond market and purchased Italian and Spanish debt, and we may see the Governing Council take additional steps to shore up the real economy as the region slips back into a recession. As European policy makers become increasingly reliant on the ECB to address the ongoing turmoil within the financial system, the central bank may have little choice but to expand its nonstandard measures further, but we may see President Mario Draghi resort to another rate cut in December as the fundamental outlook for the euro-area turns increasingly bleak. Nevertheless, the troika - the European Commission, European Central Bank, and the International Monetary Fund - will release its assessment of Portugal's bailout package later today, and the developments is likely to influence market sentiment as the sovereign debt crisis remains in focus. As the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 fails to hold up as support, the sharp reversal from 1.4246 looks poised to gather pace over the remainder of the week, and we may see the euro-dollar threaten the rebound from 1.3145 as investor confidence remains frail.

British Pound: BoE Curbs Outlook, Pledges More QE

The British Pound fell to a fresh monthly low of 1.5781 as the Bank of England turn increasingly cautious towards the U.K. economy, and the sterling is likely to face additional headwinds over the near-term as the central bank shows an increased willingness to expand monetary policy further. Indeed, the BoE curbed its economic assessment for Britain while delivering its quarterly inflation report, and said that growth may be 'broadly flat' throughout the first-half of 2012 as policy makers expect economy activity to slow substantially over the coming months. In turn, central bank Governor Mervyn King pledged to increase its asset purchases to stimulate the ailing economy, and the MPC may carry its easing cycle into the following year as the committee sees an increased risk of undershooting the 2% target for inflation. As the GBP/USD extends the decline from earlier this week, we may see the pair come up against the 38.2% Fib from the 2009 low to high around 1.5680-1.5700 to test for near-term support, but the rebound from 1.5273 may give way as the U.K. faces an increased risk of a double-dip recession.

U.S. Dollar: Inflation Slows More-Than-Expected, Risk Aversion To Gather Pace

The U.S. dollar continued to appreciate against its major counterparts following the flight to safety, but we may see market participants move away from the reserve currency should the Fed show an increased willingness to expand policy further. The headline reading for U.S. inflation grew at an annual rate of 3.5% in October amid forecasts for a 3.7% print, and easing price pressures may open the door for additional monetary support as the central bank aims to encourage a sustainable recovery. Speculation for another round of quantitative easing would certainly dampen the appeal of the greenback, but the uncertainties surrounding the global economy may continue to prop up the greenback as it continues to benefit from safe-haven flows. As equity futures foreshadow a lower open for the U.S. market, we may see the reserve currency appreciate further during the North American trade, but the developments coming out of Europe may help to bolster market sentiment as the EU increase its efforts to address the debt crisis.

--- Written by David Song, Currency Analyst

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