Talking Points

  • Euro: Bundesbank Lowers Growth Forecast, ECB To Cut Rates Further
  • British Pound: Hits Fresh Monthly Low, U.K. To Roll Out Credit-Easing Program
  • U.S. Dollar: Benefits From Risk Aversion, 'Super-Committee' Under Scrutiny

Euro: Bundesbank Lowers Growth Forecast, ECB To Cut Rates Further

The Euro bounced back from an overnight low of 1.3429 to maintain the range from the previous week, but the single-currency is likely to face additional headwinds over the coming days as the fundamental outlook for Europe deteriorates. Indeed, the Bundesbank warned of a 'pronounced' slowdown in the euro-area as the central bank sees Europe's largest economy growing 0.5% - 1.0% next year versus an initial forecasts for a 1.8% expansion in GDP, and the slowing recovery may prompt the European Central Bank to carry its easing cycle into 2012 as the region struggles to contain the sovereign debt crisis.

As European policy makers become increasingly reliance on the ECB, Governing Council member Ewald Nowotny talked up speculation for lower borrowing costs while speaking in Vienna, but went onto say that printing money is not an option as the central bank stands firm against financing government debt. As the EUR/USD continues to trade above 1.3400, we may see the exchange rate consolidate ahead of the holiday weekend, but the pair looks poised to threaten the rebound from 1.3145 as market participants increase bets for lower borrowing costs in Europe. According to Credit Suisse overnight index swaps, market participants now see a 60% chance for a 25bp rate cut in December, and heightening speculation for lower borrowing costs is likely to drag on the exchange rate as investors weigh the outlook for monetary policy.

British Pound: Hits Fresh Monthly Low, U.K. To Roll Out Credit-Easing Program

The British Pound tumbled to a fresh monthly low of 1.5612 and the sterling may continue to give back the rebound from 1.5273 as policy makers cast a dour outlook for the Britain. U.K. Prime Minister David Cameron said his government will unveil a 'massive' credit-easing program to stimulate the ailing economy, and pledged to 'use the strength of the government's balance sheet to pump billions of pounds into reducing the cost of loans for small and medium sized businesses' as the region faces an increased risk of a double-dip recession. As the slowing recovery in the U.K. dampens the outlook for inflation, the Bank of England may also take additional steps to stem the downside risks for the region, and bets for more quantitative easing is likely to weigh on the exchange rate as the central bank turns increasingly pessimistic towards the economy. As the GBP/USD fails to hold support around the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700, the pair looks poised to make another run at the 50.0% Fib around 1.5250, and the Pound may trade heavy over the remainder of the year as the BoE talks up speculation for additional monetary support in the following year.

U.S. Dollar: Benefits From Risk Aversion, 'Super-Committee' Under Scrutiny

The U.S. dollar advanced against most of its major counterparts on Monday as market participants scaled back their appetite for yields, and the reserve currency may appreciate further during the North American trade as the flight to safety gathers pace. As the U.S. equity market opens lower, the shift away from risk-taking behavior should increase the appeal of the greenback, but the ballooning budget deficit in the world's largest economy may weigh on the exchange rate as U.S. policy maker struggle to meet on common ground. As the stalemate in the congressional 'super-committee' comes under increased scrutiny, the lack of urgency to balance public finances could spur speculation for a credit-rating downgrade, and the weakening outlook for fiscal discipline could instill a bearish outlook for the greenback as the risk for contagion intensifies. Nevertheless, it seems as though the shift in risk-taking behavior will prop up the dollar over the next 24-hours of trading, but the greenback may face choppy price action going into the holiday trade as U.S. traders go offline starting on Wednesday.

--- Written by David Song, Currency Analyst