Talking Points

  • Euro: Greek PSI Deal Imminent, ECB To Cut Rates Further
  • U.S. Dollar: 4Q GDP Misses Forecast, Sticky Prices Become More Apparent

Euro: Greek Deal In 'Coming Days,' ECB To Cut Rates Further

The Euro pared the overnight decline to 1.3077 as Italy sold EUR 11B in 182-day bills yielding 1.969% - which compares to the 3.251 % offered back in December - while the EU expects a Greek PSI deal to be reached in the 'coming days.' As European policy makers try to avoid a default, it seems as though the European Central Bank has little choice but to take a haircut on its Greek debt holdings, but the single currency remains at risk of facing additional headwinds over the near-term as the fundamental outlook for the region remains bleak. Indeed, ECB board member Jose Manuel Gonzalez-Paramo talked up speculation for additional monetary support, stating that borrowing costs are not 'at the minimum,' and it seems as though the Governing Council will push the benchmark interest rate below 1.00% as the region faces an increased risk for a major economic downturn in 2012. In turn, we maintain a bearish outlook for the single currency going into February, and the EUR/USD looks poised to work its way back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the pair appears to have carved out a lower top this week.

U.S. Dollar: 4Q GDP Misses Forecast, Sticky Prices Become More Apparent

The greenback struggled to hold its ground during the overnight trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a fresh monthly low of 9,773, but the reserve currency appears to be regaining its footing as the rise in risk sentiment tapers off. Indeed, the advanced GDP report showed the world's largest economy expanding an annualized 2.8% in the fourth quarter amid forecasts for a 3.0%, while private sector consumption continued to fall short of expectations as household continue to cope with easing wage growth paired with the protracted recovery in the labor market. However, as there appears to be a bit of stickiness in price growth, the recent developments further dampens speculation for another large-asset purchase program, and we expect the Fed to endorse a wait-and-see approach throughout 2012 as the recovery gradually gathers pace. As the below-forecast GDP report saps risk-taking behavior, the shift in market sentiment should prop up the USDOLLAR during the North American trade, but optimism for a Greek PSI deal could fuel risk-taking behavior as the sovereign debt crisis remains in focus.

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--- Written by David Song, Currency Analyst