Talking Points

  • Euro: ECB Shifts Burden To EU, Outlook Remains Bearish
  • British Pound: Falls To Fresh Yearly Low, Further Weakness Ahead
  • U.S. Dollar: Extends Advance, Benefits From Risk Aversion

Euro: ECB Shifts Burden To EU, Outlook Remains Bearish

According to a paper published by the European Central Bank, the sovereign debt crisis has put the 'sustainability of EMU' at risk, and said that it is 'essential to ensure effective policy coordination and sound public finances in the future' as policy makers struggle to stem the risk for contagion. Although there's been an increased reliance on the ECB to balance the risks for the region, the views expressed in the document appear to be placing the burden on government officials, and the central bank may continue to endorse a wait-and-see approach over the remainder of the year as it maintains its one and only mandate to ensure price stability.

As the ECB talks down speculation for further easing, the lack of coordination amongst European policy makers is likely to fuel a bearish outlook for the euro, and the single-currency may continue to retrace the advance from earlier this year as investor confidence falters. As the EUR/USD clears the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we may see the pair threaten the rebound from mid-January (1.3243), and the euro-dollar looks poised to push lower over the remainder of the week as the relative strength index dips into oversold territory. We should see the downturn in the EUR/USD accelerate as long as the RSI holds below 30, and the single-currency is likely to face additional headwinds over the near-term as the region faces a slowing recovery.

British Pound: Falls To Fresh Yearly Low, Further Weakness Ahead

The British Pound slipped to a fresh yearly low of 1.5327 and the sterling may retrace the rebound carried over from the previous year as market participants speculate the Bank of England to expand monetary policy further in the coming months. However, former MPC member Andrew Sentance argued more quantitative easing would not be 'particularly effective' while speaking on CNBC, and warned that the main cause of the economic slowdown is due to high inflation 'squeezing disposable incomes.' As the U.K. faces a growing risk of a double-dip recession, it looks as though the BoE will step up its efforts to shore up the real economy, and the GBP/USD may continue to trade heavy in the days ahead as the RSI pushes deep into oversold territory. In turn, the pound-dollar come up against the September 2010 low at 1.5296, and we don't expect to see a near-term correction until the RSI crosses back above 30.

U.S. Dollar: Extends Advance, Benefits From Risk Aversion

The greenback extended the advance from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a high of 9990, and the reserve currency may continue to appreciate over the remainder of the week as it benefits from safe-haven flows. As the U.S. stock market opens sharply lower, the shift in market sentiment may gather pace throughout the remainder of the day, and currency traders may continue to flood into the USD as the flight to safety accelerates. As the economic docket remains fairly light over the next 24-hours of trading, we should see risk trends continue to dictate price action in the foreign exchange market, and the dollar may rally further on Friday as market participants scale back their appetite for yields.