- Euro: Relief Rally Tapers Off, ECB Struggle To Meet On Common Ground
- British Pound: Maintains Range, BoE Inflation Report In Focus
- U.S. Dollar: Regains Footing on Risk Aversion, Rebound From 9,454 To Accelerate
Euro: Relief Rally Tapers Off, ECB Struggle To Meet On Common Ground
The Euro struggled to hold its ground on Monday and the single-currency may continue to give back the advance from the previous week as the political shift in the euro-area comes under increased scrutiny. As the relief rally in the EUR/USD tapers off, it seems as though we will see the exchange rate continue to hold below the 20-Day SMA at 1.3813, and the exchange rate may threaten the rebound from 1.3483 as the fundamental outlook for Europe turns increasingly bleak. Indeed, German Chancellor Angela Merkel warned that Europe faces its 'most difficult hour' since World War II, and continued to oppose a euro-area bond while delivering a speech in front of the Christian Democratic Union.
Meanwhile, European Central Bank board member Jens Weidmann argued against the use of monetary policy to tackle fiscal issues while speaking at a conference in Frankfurt, and placed the burden on the euro-area governments as the central bank maintains its one and only mandate to ensure price stability. At the same time, Governing Council member Klaas Knot reiterated that the ECB's bond purchases are a 'temporary phenomenon,' and went onto say that nonstandard measures will have to be taken over by the governments according to an interview with an Amsterdam newspaper. The comments struck by Weidmann and Knot suggest that the ECB will refrain from easing monetary policy further, and we may see a growing rift within the central bank even as the region slips back into a recession. As Europe struggles to get its house in order, the heightening risk for contagion continues to dampen the outlook for the Euro, and the EUR/USD may face a sharp selloff in the days ahead as it appears to be carving out a head-and-shoulders top.
British Pound: Maintains Range, BoE Inflation Report In Focus
The British Pound maintained the range from the previous month as it pared the overnight decline to 1.5922, but the sterling will face headwinds over the coming days as we expect the Bank of England to curb its fundamental assessment for the U.K. Indeed, the BoE quarterly inflation report highlights the biggest event risk for the Pound, and the central bank may talk up speculation for additional monetary support should policy makers see an increased risk of undershooting the 2% target for inflation. As the event risks lined up for this week is expected to instill a weakened outlook for the U.K., we may see a bearish breakout in the GBP/USD, and the exchange rate may fall back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700 to test for near-term support. However, as the MPC looks to carry its easing cycle into the following year, the pound-dollar could be in the process of marking a major top in November, and the sterling may trade heavy over the coming months as the region faces a growing risk of a double-dip recession.
U.S. Dollar: Regains Footing on Risk Aversion, Rebound From 9,454 To Accelerate
The U.S. dollar traded higher on Monday following the rebound in risk aversion, and the reserve currency may continue to gain ground throughout the North American trade as the U.S. equities market traders lower. As the shift away from risk-taking behavior gathers pace, the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) carves out a higher low, we should see the greenback extend the rebound from 9,454, and the USD should continue to retrace the sharp decline from 10,134 as it continues to benefit from safe-haven flows. As the economic docket remains bare for the remainder of the day, risk trends should drive price action throughout the North American session, but the ongoing developments coming out of Europe is likely to influence market sentiment as the sovereign debt crisis continues to take center stage.