Talking Points

  •  Euro: Outlook Remains Bearish
  •  British Pound: U.K. CPI On Tap, BoE Minutes Take Center Stage
  •  U.S. Dollar: TO Benefit From Shift In Risk Sentiment

The Euro extended the overnight advance to reach a fresh daily high of 1.4387, but the near-term rally could be coming to an end as the EUR/USD continues to trade within a bearish pattern. European Commissioner for Economic and Monetary Affairs Olli Rehn said France, Spain and Italy will not need aid according to an interview with a German newspaper, and went onto say that 'steps by the European Central Bank to stabilize markets have become necessary' in light of the recent turmoil within the financial system. At the same time, Mr. Rehn announced that it will take weeks rather than months to carry out the second bailout package for Greece, but the renews efforts may fail to prop up the single-currency as policy makers struggle to restore investor confidence.

However, the EU may have little choice but to expand the European Financial Stability Facility to curtail the risk for contagion, and the ECB may come under increased pressures to maintain an 'accommodative' policy as the region faces a slowing recovery. As governments across the region take extraordinary measures to balance the deficit, the tough austerity measures is likely to exacerbate the economic slowdown, and we should see the Governing Council carry its current policy into the following year as the fundamental outlook remains clouded with high uncertainty. As the central bank softens its hawkish tone for monetary policy, we should see the ECB talk down speculation for higher interest rates, and EUR/USD remains at risk of a bearish breakout as price action continues to trading within the descending triangle. According to Credit Suisse overnight index swaps, market participants now see a chance for a rate cut over the next 12-months, and the single-currency may trade heavy over the near-term should interest rate expectations deteriorate further.

The British Pound extended the advance from the previous week to reach a high of 1.6371, and the sterling may continue to push higher over the next 24-hours of trading as the economic docket is expected to show a rebound in U.K. inflation. As price pressures reemerge, the faster pace of price growth could spark a bullish reaction in the GBP/USD, and the pair may continue to recoup the losses from earlier this month as the reading generates expectations for a rate hike. However, the Bank of England meeting minutes highlight the biggest event risk for the sterling, and we may see a growing shift in the central bank as policy makers see an increased risk to undershoot the 2% target for inflation. In light of the slowing recovery, the BoE is likely to cast a dovish outlook for future policy, and the MPC may show an increased willingness to expand its asset purchase program beyond the GBP 200B target in order to balance the risks for the region. Should the central bank open the door for more monetary stimulus, the near-term rally in the GBP/USD may give out, and the pair may make another run at the 200-Day SMA (1.6086), which could threaten the rebound from 1.5781.

The U.S. dollar lost ground against most of its major counterparts, but we may see the greenback regain its footing as the rise in risk appetite appears to be tapering off. As developments across the globe reinforce a weakened outlook for future growth, we may see risk aversion flowing back into the currency market, and the reserve currency may regain its footing throughout the week as it benefits from safe-haven flows. Meanwhile, we could hear a lot of dissent views amongst Fed policy makers this week as William Dudley and Richard Fisher are scheduled to speak in the days ahead, and the difference in opinion could fuel a bearish outlook for the reserve currency as the majority of the FOMC sees scope to carry the zero interest rate policy well into 2013.