Talking Points

  • Euro: Moody's Cuts Spain's Credit Rating, Continues To Hold Below 50-Day SMA
  • British Pound: BoE Votes Unanimously, Maintains Dovish Tone For Policy
  • U.S. Dollar: Weighed By Risk Appetite, Fed Beige Book On Tap

Euro: Moody's Cuts Spain's Credit Rating, Continues To Hold Below 50-Day SMA

The Euro advanced to an overnight high of 1.3867 even as Moody's Investor Services lowered Spain's credit rating to A1 from Aa2, but the single-currency may consolidate throughout the North American trade as it maintains the narrow range carried over from the previous week. As the EU Summit comes into focus, German Finance Minister Wolfgang Schaeuble said the European Financial Stability Facility could be increased to EUR 1 trillion according to a report by Financial Times Deutschland, and the increased efforts to stabilize the financial system should help to instill a bullish outlook for the single-currency as policy makers try to stem the risk for contagion.

Nevertheless, it seems as though the EUR/USD will trend sideways ahead of the meeting as the exchange rate fails to push above the 50-Day moving average (1.3903) for the second time this week, but market participants may turn increasing bearish against the single-currency should the group struggle to meet on common ground. In turn, the euro-dollar could be carving out a near-term top around the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, and the pair may threaten the rebound from 1.3145 as the fundamental outlook for Europe remains weak. However, a greater push to strengthen the rescue package paired with renewed efforts to shore up the banking sector may help to prop up market sentiment, and the EUR/USD may continue to retrace the sharp decline from the previous month as investor confidence improves.

British Pound: BoE Votes Unanimously, Maintains Dovish Tone For Policy

The British Pound bounced back from 1.5710 during the European trade, but the sterling may face additional headwinds over the near-term as the Bank of England keeps the door open to expand monetary policy further. After voting unanimously to increase the asset purchase program to GPB 275B, the BoE continued to highlight an increased risk of undershooting the 2% target for inflation and the central bank may continue to take a preemptive approach to shore up the ailing economy as the region faces a growing risk of a double-dip recession. In addition, MPC board member Adam Posen said that the bank still has 'ammo' to stimulate growth while speaking with the Lancashire Evening Post, and went onto say that the committee needs to be 'one step ahead' in order to balance the risks for the region. The dovish tone held by the BoE continues to cast a bearish outlook for the GBP/USD, and the pound-dollar may give back the rebound from 1.5273 as interest rate expectations deteriorate.

U.S. Dollar: Weighed By Risk Appetite, Fed Beige Book On Tap

The greenback weakened across the board on Wednesday following the shift in market sentiment, but the rise in risk may taper off during the North American trade as equity futures foreshadow a lower open for the U.S. market. Should investor confidence deteriorate, we should see the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) pare the overnight decline to 9,694, and the reserve currency may trade higher over the remainder of the week as it benefits from safe-haven flows. The Fed's Beige Book due out later today may weigh on risk as we expect the central bank to maintain a cautious outlook for the world's largest economy, and the survey may highlight an increased willingness to expand monetary policy further as the region faces slowing recovery.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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