Talking Points

  • Euro: Germany Approves Enhanced Bailout Fund, Range-Bound Prices Ahead
  • British Pound: Ignores Fundamentals, Consolidation On Tap
  • U.S. Dollar: Carving Out Top Ahead Of October

Euro: Germany Approves Enhanced Bailout Fund, Range-Bound Prices Ahead

Germany's lower house of parliament voted 523 to 85 to broaden the powers of the European bailout fund, and the renewed efforts to address the sovereign debt crisis should help to prop up the Euro over the remainder of the week. However, the European Central Bank pushed for more changes, encouraging Italy to take more actions in tackling the budget deficit, and the Governing Council may have little choice but to delay its exit strategy further as the region faces a slowing recovery.

Indeed, market participants have fully priced-in a 25bp rate cut from the ECB, but the central bank may also show an increased willingness to expand its nonstandard measures in an effort to ease the ongoing turmoil within the financial system. A shift in policy would undermine the recent strength in the single-currency, and we may see the EUR/USD given back the advance from earlier this year as the fundamental outlook for Europe deteriorates. As the euro-dollar fails to test the previous day's high (1.3689), the pullback from 1.3678 may accelerate throughout the North American trade, and the pair may continue to consolidate ahead of the policy meeting as investors wait for the updated assessment.

British Pound: Ignores Fundamentals, Consolidation On Tap

The British Pound pared the overnight advance to 1.5701 even as the economic docket encourage an improved outlook for the U.K., and the GBP/USD may consolidate over the remainder of the week as market participants weigh the outlook for monetary policy. As the Bank of England is widely expected to maintain its current policy next week, the wait-and-see approach is likely to spur a muted reaction in the exchange rate, and the sterling may trend sideways over the near-term as the central bank refrains from releasing a policy statement. In turn, market participants will certainly look forward to the policy meeting minutes, which are due out on October 19, and we may see the MPC strike a neutral outlook for monetary policy as inflation remains well-above the 2% target. It seems as though we will see the GBP/USD continue to hold above the 1.5500 level, but a shift in market sentiment may threaten the rebound from 1.5327 as risk trends drive price action in the currency market.

U.S. Dollar: Carving Out Top Ahead Of October

The U.S. dollar struggled to hold its ground during the overnight trade and the reserve currency may extend the decline from earlier this week as market participants increase their appetite for risk. As the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) trades back below 9,900, it appears that the greenback has carved out a top ahead of October, and investor confidence may continue to pick up over the near-term as global policy makers increase their efforts to calm market jitters. The shift in risk-taking behavior would dampen demands for the greenback, but the slowdown in the global recovery may continue to fuel a flight to safety as the fundamental outlook for the world economy remains clouded with high uncertainty.