Euro Struggles As Greece Fails To Secure Bailout, ECB Under Pressure

By Roger Baettig | September 10 2012 9:29 AM

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Euro: Greece Struggles To Secure Next Tranche, Italy Rejects ECB's New Plan
British Pound: Correction Under Way, Former Resistance In Focus
U.S. Dollar: Consumer Credit On Tap, QE3 Bets Rise Ahead Of FOMC

Euro: Greece Struggles To Secure Next Tranche, Italy Rejects ECB's New Plan

The Euro slipped to 1.2768 as Greece's Pasok party warned that the Troika - the European Union, European Central Bank, and the International Monetary fund - rejected more than EUR 2.0B of the proposed EUR 11.5B austerity program, while Italian Prime Minister Mario Monti argued against the conditionality proposed by the ECB's new bond-purchasing program as the budget-cutting measures continue to dampen growth. At the same time, a German official filed a complaint against the ECB's non-standard measure and said that the constitutional court should not rule on the European Stability Mechanism as the September 6 rate decision 'fundamentally changes' the role of the central bank, and President Mario Draghi may face increased criticisms as the Governing Council looks to expand its balance sheet further.

In response, ECB board member Joerg Asmussen defended the unlimited purchasing program, stating that 'new purchase program is better than the old one,' but the new measure will only help to buy more time as the debt crisis continues to drag on the real economy. As the euro-area faces a deepening recession, it seems the Governing Council may have little choice but to implement a range of tools over the coming months, and we should see the central bank embark on its easing cycle throughout the second-half of the year as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support. Although the upward trending channel in the EURUSD continues to instill a bullish outlook for the single currency, the euro-dollar looks poised for a pullback as it struggles to clear the 200-Day SMA at 1.2835. At the same time, we will be keeping a close eye on the relative strength index as it falls back from a high of 73, and we may see the EURUSD fall back towards former resistance around 1.2640-50 as the rally remains overbought.

British Pound: Correction Under Way, Former Resistance In Focus

The British Pound weakened to 1.5979 on Monday as market participants scaled back their appetite for risk, and the pullback may turn into a larger correction as the relative strength index comes off of overbought territory. Nevertheless, we will preserve our bullish forecast for the GBPUSD as the Bank of England slowly moves away from its easing cycle, but risk-trends may heavily influence the sterling ahead of the BoE Minutes due out on September 19 as market participants weigh the outlook for monetary policy. In turn, we may see the GBPUSD fall back towards former resistance around 1.5740-50 to test for new support, and the pair may continue to recoup the losses from earlier this year as it continues to carve a series of higher highs paired with higher lows.

U.S. Dollar: Consumer Credit On Tap, QE3 Bets Rise Ahead Of FOMC

The greenback pared the sharp decline from Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 9,926, and the reserve currency may continue to track higher over the next 24-hours of trading as risk sentiment wanes. Although the FOMC interest rate decision scheduled for September 13 highlights the biggest event risk for this week, the ongoing expansion in consumer credit may instill an improved outlook for growth, and a strong print may generate additional dollar strength as it dampens the scope of seeing additional monetary support. Nevertheless, it seems as though market participants are betting on QE3 this week amid the dismal Non-Farm Payrolls report, but the committee may look to extend its zero-interest rate policy (ZIRP) pledge as it continues to rely on its transmission mechanisms to shore up private sector activity.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

19:00

15:00

Consumer Credit (JUL)

$9.100B