Talking Points

  • Euro: Greek PSI Talks In Focus, EU Toughens Fiscal Pact
  • British Pound: Capped By 50-Day SMA, BoE To Maintain Dovish Outlook
  • U.S. Dollar: Existing Home Sales On Tap, FOMC To Soften Dovish Rhetoric

Euro: Greek PSI Talks In Focus, EU Toughens Fiscal Pact

The Euro slipped to an overnight low of 1.2889 as Greece struggles to strike a deal with private investors, while the EU announced plans to toughen the new fiscal pact as the group of finance ministers are scheduled to meet on January 23. Although talks between Greece and the Institute of International Finance are expected to resume today, the deadlock between the two parties continues to fuel fears of a default, and the heightening risk for contagion will continue to drag on risk-taking behavior as the fundamental outlook for the euro-area turns increasingly bleak.

As the EU meeting on tap for the following week comes into focus, we may see the group of finance ministers increase their efforts to restore investor confidence, but there could be a growing rift amongst European officials as a new draft requires a 'correction mechanism' that would take immediate effect should countries deviate from the fiscal target. Indeed, the increased efforts to address the budget deficit strengthens the long-term outlook for the euro-area, but the tough austerity measures raises the risk of a major economic downturn in 2012 as the governments operating under the monetary union pledge to take additional steps in balancing public finances. As risk sentiment falters, the EUR/USD may continue to give back the advance from earlier this week, and the exchange rate may fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the short-term rebound tapers off ahead of 1.3000.

British Pound: Capped By 50-Day SMA, BoE To Maintain Dovish Outlook

The British Pound continued to gain ground on Friday, with the GBP/USD advancing to a fresh weekly high of 1.5531, but we may see the short-term rally taper off as the pair remains capped by the 50-Day SMA at 1.5581. As the Bank of England is scheduled to release its policy meeting next week, the fresh batch of comments is likely spark increased volatility in the exchange rate, but we may see a major selloff in the pound-dollar should the central bank talk up speculation for additional monetary support. As the slowing recovery in the U.K. heightens the risk for a double-dip recession, we expect the BoE to maintain a dovish outlook for monetary policy, and the Monetary Policy Committee may see scope to increase its asset purchase program beyond the GBP 275B target in the first-half of 2012 as the board sees an increased risk of undershooting the 2% target for inflation. In turn, the British Pound may struggle to hold its ground in the week ahead, and we may see another test of the 50.0% Fib from the 2009 low to high around 1.5270-1.5300 as

U.S. Dollar: Existing Home Sales On Tap, FOMC To Soften Dovish Rhetoric

The greenback bounced back on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to an overnight high of 9,941, and the shift away from risk-taking behavior looks poised to gather pace during the North American trade as the U.S. equity market opens lower. However, as existing home sales in the world's largest economy is expected to increase for the third consecutive month in December, a positive development could spark a rebound in market sentiment, and the USDOLLAR may continue to give back the advance from earlier this year as market participants raise their appetite for risk. Nevertheless, as the FOMC interest rate decision scheduled for the following week comes into focus, we expect the central bank to soften its dovish tone for monetary policy given the more robust recovery, and Chairman Ben Bernanke may endorse a neutral policy stance for 2012 as the U.S. skirts a double-dip recession. As we anticipate the Fed to talk down speculation for another round of quantitative easing, the policy statement could spark a sharp rebound in the USD, and we will maintain a bullish outlook for the reserve currency as the developments coming out of the world's largest economy continues to top market expectations.

--- Written by David Song, Currency Analyst