Talking Points

  • Euro: Increased Reliance On ECB To Support Monetary Union
  • British Pound: BoE Holds Cautious Outlook, Consolidation Ahead
  • U.S. Dollar: Weighed By Risk Appetite, Index Falls

A rebound in risk appetite prop up the Euro during the overnight trade, but the near-term outlook for the EUR/USD remains bearish as European policy makers struggle to address the sovereign debt crisis. Market participants are certainly optimistic for the Jackson Hole Economic Policy Symposium on August 25-27, and there's speculation that European Central Bank President Jean-Claude Trichet will take additional steps to strengthen the financial system as the region faces a heightening risk for contagion.

Indeed, the Bundesbank, Germany's central bank, criticized the recent decisions made by the EU, stating that the new initiatives threatens 'to reduce the consistency of the initially agreed institutional framework of the currency union,' and went onto say that the ongoing turmoil within the euro-area will put increased pressures on the ECB for a 'looser' policy stance. In turn, there could be an increased reliance on the central bank to help calm market fears, and the Governing Council may introduce additional tools to restore investor confidence in an effort to shore up the single-currency system. In light of the recent comments coming out of Europe, it seems as though we will see the ECB talk down speculation for higher borrowing costs, and the near-term rally in the EUR/USD should give way as the pair continues to trade within a bearish pattern. As the euro-dollar struggles to hold above the 78.6% Fibonacci from the 2009 high to the 2010 low around 1.4440-60, price action should continue to approach the apex of the descending triangle, and the pair looks poised to threaten the rebound from 1.3836 as the fundamental outlook for Europe deteriorates.

The British Pound fell back from an overnight high of 1.6520 and the sterling may continue to give back the advance from earlier this month as the Bank of England soften its outlook for the U.K. BoE board member Ben Broadbent held a cautious outlook for the region in light of the slowing recovery, but argued that the current policy stance remains appropriate during an interview with the BBC Radio. Although board members Spencer Dale and Martin Weale scale back their votes to increase the benchmark interest rate by 25bp, it seems as though we will need to see a greater threat of a double-dip for the central bank to expand monetary policy further, but there could a growing shift within the MPC as Governor Mervyn King continues to highlight the risk of undershooting the 2% target for inflation. As the BoE continues to endorse its current policy, the GBP/USD may continue to consolidate over the near-term, and the exchange rate may trade within a broad range as market participants weigh the dissenting views surrounding the U.K.

The greenback weakened against most of its major counterparts on Monday, with the Dow Jones-FXCM U.S. dollar (Ticker: USDollar)index slipping to a low of 9447, and the reserve currency may face additional headwinds during the North American trade as equity futures foreshadow a higher open for the U.S. market. As the economic docket remains fairly light for the next 24-hours of trading, market sentiment should continue to dictate price action for the major currencies, and the optimism surrounding the Jackson Hole conference may prop up investor confidence as market participants speculate Fed Chairman Ben Bernanke to introduce additional measures to stimulate the ailing economy.