Talking Points

  •  Euro: Threatens Downward Trend Following Spain, France Bond Auction
  •  British Pound: To Maintain Range Ahead Of BoE Minutes, Eyes 38.2% Fib
  •  U.S. Dollar: Index Carves Out Higher Low, Upward Trend To Gather Pace

Euro: Threatens Downward Trend Following Spain, France Bond Auction

The Euro rallied to a fresh weekly high of 1.2926 following the better-than-expected bond auction in Spain and France, and the single currency may continue to recoup the losses from earlier this year as the EUR/USD breaks out of the downward trending channel carried over from the end of October. As the heightening risk for contagion continues to drag on market sentiment, the EU said new proposals are being drawn up for Greece's second bailout package, and went onto say that the group 'strongly supports' increasing the International Monetary Fund's lending capacity as the sovereign debt crisis drags on the global financial system.

As European policy makers increase their efforts to address the debt crisis, the rebound from 1.2625 may gather pace over the near-term, but the push above the 20-Day SMA (1.2866) may turn out to be a false break as we expect the single currency to face additional headwinds over the near-term. As the European Central Bank monthly report highlights a dovish tone for future policy, it seems as though the Governing Council will take additional steps to shore up the ailing economy, and the EUR/USD should resume the downward trend from the previous year as the fundamental outlook for the euro-area turns increasingly bleak. In turn, the short-term rebound in the exchange rate may present an opportunity to sell the pair at a higher price, and we will maintain a bearish outlook for the euro-dollar as the region faces a growing risk for a major economic downturn in 2012.

British Pound: To Maintain Range Ahead Of BoE Minutes, Eyes 38.2% Fib

The British Pound extended the advance from earlier this week to reach a high of 1.5464 on Thursday, and the GBP/USD looks poised to make a run at the 38.2% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700 as market participants increase their appetite for risk. As we're expecting to see a rebound in U.K. retail sales, a positive consumption report could strengthen the sterling over the next 24-hours of trading, but we may see the pound-dollar trade sideways in the coming days as market participants eagerly wait for the Bank of England policy meeting minutes due out on January 25. Until then, we expect the GBP/USD to respect the range between the 50.0% Fib (1.5270-1.5300) and the 38.2% Fib (1.5690-1.5700), but we may see the sterling come under pressure next week should the BoE talk up speculation for more quantitative easing.

U.S. Dollar: Index Carves Out Higher Low, Upward Trend To Gather Pace

The greenback continued to lose ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a fresh weekly low of 9,908, but we will stick to our bullish outlook for the USD as the fundamental outlook for the world's largest economy improves. Although the housing start report fell short of market expectations, the ongoing improvement in the labor market paired with the stickiness in the core rate of inflation certainly dampens the scope for another round of quantitative easing, as we should see the USDOLLAR maintain the upward trend carried over from the previous year as it carves out a higher low in January. In turn, we maintain our forecast for a run at the 78.6% Fib (10,117) and the dollar looks poised to appreciate further in 2012 as the Federal Reserve softens its dovish tone for monetary policy.

--- Written by David Song, Currency Analyst