Talking Points

  • Euro: Maintains Downward Trend, Juncker Sees EU Meeting IMF Loan Deadline
  • British Pound: To Consolidate Ahead Of BoE Minutes
  • U.S. Dollar: Weakness To Be Short-Lived, Sticky Prices Dampen Risk For QE3

Euro:Maintains Downward Trend, Juncker Sees EU Meeting IMF Loan Deadline

The Euro advanced to 1.3083 as Euro Group President Jean-Claude Juncker expects the EU to meet the December 19 deadline to setup a credit line with the International Monetary Fund, and the single currency may continue to recoup the losses from earlier this month as European policy makers step up their efforts to stem the risk for contagion. In addition, Mr. Juncker said that the group may meet next week to further discuss the debt crisis, but went onto say that the region is 'on the brink of a recession' as the push to implement fiscal austerity bears down on the recovery.

In contrast, the Bundesbank argued that there's no 'urgent need' to draw up a final decision on the IMF loan, and went onto say that the whole situation needs to be carefully evaluated as the central waits to hear from German Financial Minister Wolfgang Schaeuble. As European policy makers struggle to meet on common ground, there is likely to be increased pressure on the European Central Bank to expand monetary policy further, but we may see Governing Council continue to move away from its nonstandard measures as there appears to be a growing rift within the group. ECB Board member Ewald Nowotny said that the central banks' 'massive' liquidity measures will have a positive impact on the economy, and went onto say that the committee is aware of the weakening outlook for the euro-area while speaking in Vienna. As the economic recovery falters, we are likely to see the central bank ease monetary policy further in 2012, and we are likely to see the single currency face additional headwinds over the near-term as investor confidence remains fragile. As the EUR/USD struggles to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we should see the exchange rate maintain the downward trend from the end of October, and the pair looks poised to threaten the yearly low at 1.2872 as the fundamental outlook for the region turns increasingly bleak.

British Pound: To Consolidate Ahead Of BoE Minutes

The British Pound extended the advance from the previous day to reach a high of 1.5557, but the sterling may come under pressure in the week ahead should the Bank of England policy meeting minutes show an increased willingness to expand monetary policy further. In light of the recent comments from the BoE, it seems as though the statement will highlight the increased risk of a double-dip recession, and the central bank may talk up speculation for additional monetary support as policy makers see a greater risk of undershooting the 2% target for inflation. In turn, we may see the GBP/USD consolidate going into the following week, but a very dovish statement could lead the pound-dollar to threaten the rebound from 1.5270 as market participants see the MPC expanding the asset purchase program beyond the GBP 275B target in the following year.

U.S. Dollar: Weakness To Be Short-Lived, Sticky Prices Dampen Risk For QE3

The greenback continued to lost ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back to a low of 9,996, but the recent weakness in the reserve currency is likely to be short-lived as the outlook for the world's largest economy improves. Although the headline reading for U.S. inflation fell back to an annualized rate of 3.4% in November from 3.5% in the previous, core consumer prices unexpectedly advanced 2.2% from the previous year to mark the fastest pace of growth since October 2008, and the stickiness in price growth dampens the Fed's scope to expand monetary policy further as Fed officials see the recovery gathering pace in the following year. As market participants scale back expectations for another large-scale asset purchase program, the bullish sentiment underling the greenback should gather pace over the remainder of the year, and we may see the Fed continue to soften its dovish tone for monetary policy as growth and inflation pick up.

--- Written by David Song, Currency Analyst