Euro Propped Up By EU Chatter, Greece Continues To Seek More Time

By Roger Baettig | September 14 2012 9:17 AM

Sponsorship Link

Talking Points

Euro: Spain Prepares Reform Package, Greece Continues To Look For Extension
British Pound: Remains Overbought, BoE Minutes In Focus
U.S. Dollar: Retail Sales Tops Forecast, Inflation Remains Below 2% Target

Euro: Spain Prepares Reform Package, Greece Continues To Look For Extension

The Euro rallied to a fresh monthly high of 1.3120 as finance ministers across the monetary union talked down speculation for a Spanish bailout, while European Central Bank President Mario Draghi saw a case 'to be optimistic' as the new bond-purchasing program offers a 'fully effective backstop mechanism that is meant to remove the tail risk for the euro area.'

Indeed, Eurogroup President Jean-Claude Juncker said Spain will have a reform package by the end of the month as the region works to restructure its banking sector, while there's talk that Greece will ultimately obtain an extension to meet its budget target as the government pledges to finalize its budget-cutting measures by the end of October. However, as the governments operating under the monetary union become increasingly reliant on monetary support, we may see European officials make additional attempts to buy more time, and the ECB may come under increased pressure to expand policy further as the region faces a deepening recession.

As the relative strength index on the EURUSD pushes deeper into overbought territory, the bullish momentum may continue gather pace in the days ahead, but the lack of momentum to clear the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 may ultimately produce a short-term correction in the exchange rate should the economic developments on tap for the following week instill a weakened outlook for the region.

British Pound: Remains Overbought, BoE Minutes In Focus

The British Pound advanced to 1.6249 as market participants continued to ramp up their appetite for risk, but the sterling remains poised for a short-term correction once we see the relative strength index on the GBPUSD fall back below 70.

As the economic docket for the following week is expected to instill a weakening outlook for growth and inflation, a slew of dismal developments coming out of the U.K. may set the stage for a near-term correction, but the Bank of England Minutes may prop up the Pound as the central bank reverts back to a wait-and-see approach. Indeed, the policy statement may sound more upbeat this time around as the new initiatives to boost private sector activity gets underway, and we may see the central bank slowly move away from its easing cycle as the economic recovery picks up.

In turn, we may see the bullish sentiment surrounding the British Pound gather pace following a less dovish statement, and the sterling should continue to outperform against its major counterparts amid the shift in the policy outlook.

U.S. Dollar: Retail Sales Tops Forecast, Inflation Remains Below 2% Target

The greenback weakened further on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tumbling to a fresh monthly low of 9,740, but the reserve currency appears to be regaining its footing as the rise in U.S. retail sales encourages an improved outlook for the world's largest economy.

Indeed, household spending increased another 0.9% in August, which exceeded forecasts for a 0.8% rise, while the headline reading for inflation advanced 1.7%, which was largely in-line with market expectations. As inflation remains subdued, lower prices should help to drive private sector consumption, and the dollar may continue to recoup the losses from earlier this month as the economic docket dampens the scope of seeing additional Fed support.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:55

9:55

U. of Michigan Confidence (SEP P)

74.0