Talking Points

  • Euro: German Sees Treaty Chance In 1H 2012, Bearish Pattern Still In Play
  • British Pound: BoE Warns Of Tightening Credit Ahead Of Rate Decision
  • U.S. Dollar: Struggles To Hold Ground, Fed Keeps Door Open For QE3

Euro: German Sees Treaty Chance In 1H 2012, Bearish Pattern Still In Play

The Euro bounced back during the overnight trade to reach a high of 1.3427 and the single currency may continue to gain ground ahead of the EU Summit as European policy makers increase their efforts to restore investor confidence. German Finance Minister Wolfgang Schaeuble said the new stability pact will be crucial goal for the EU, and went onto say that a treaty change could come about during the first-half of 2012 while speaking in Vienna.

As European policy makers increase their efforts to get their house in order, optimism surrounding the EU Summit should help to prop up the Euro, but the European Central Bank interest rate decision is likely to dampen the appeal of the single currency as we expect to see another rate cut in December. Indeed, recent comments from ECB board member Ewald Nowotny suggests that more asset purchases are on the horizon, but we may see President Mario Draghi move away from the nonstandard measures as the governments operating under the monetary union becoming increasingly reliant on monetary policy. In turn, the Euro is likely to face headwinds ahead of the EU Summit, and we may see the EUR/USD fall back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as it continues to trade within a downward trending channel.

British Pound: BoE Warns Of Tightening Credit Ahead Of Rate Decision

The British Pound struggled to hold its ground on Tuesday as the Bank of England held a cautious outlook for the banking sector, and we may see the central bank take additional steps to shield the U.K. economy as the region faces a slowing recovery. The BoE highlighted the ongoing turmoil in the financial system and said that credit conditions may tighten in 2012 should commercial banks struggle to raise capital. As the fundamental outlook deteriorates, the BoE is widely expected to expand monetary policy further over the coming months, but the MPC may stick to its current policy in December as the central bank continues to weigh the outlook for the region. As the GBP/USD struggles to push back above the 20-Day SMA at 1.5700, it seems as though we will see the pound-dollar give back the rebound from 1.5422, and the sterling may trade lower over the remainder of the year as the BoE keeps the door open to expand monetary policy further.

U.S. Dollar: Struggles To Hold Ground, Fed Keeps Door Open For QE3

The greenback pared the advance from the overnight trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 9,908, and the reserve currency may struggle to hold its ground throughout the North American session as market sentiment appears to be firming up. As the U.S. equity market opens higher, we may see a rise in risk-taking behavior, but the rebound in trader sentiment could be short-lived as the fundamental outlook for the world economy deteriorates. As Chicago Fed President Charles Evens talks up speculation for another large-scale asset purchase program, increased speculation for more quantitative easing could fuel risk appetite, and we may see market participants continue to move away from the reserve currency as they continue to treat the USD as a safe-haven.

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line Distribution List to dsong@dailyfx.com.