Talking Points

  •  Japanese Yen: Mixed Across The Board
  •  British Pound: Home Prices Rise 0.3% in January
  •  Euro: European Policy Makers Meet In Brussels
  •  U.S. Dollar: Risk Sentiment To Drive Price Action, U.S Market Offline

The Euro pared the overnight decline ahead of the EU meeting in Brussels at 16:00 GMT, and the single-currency is likely to face increased volatility later today as European policy makers discuss expanding the scope of the EUR 750B bailout fund. The EUR/USD bounced back from a low of 1.3243 as European Central Bank board member Athanasios Orphanides raised the idea of empowering the European Financial Stability Facility with the ability to purchase government bonds, and the EU may take addition steps to strengthen its banking system as the risk for contagion intensifies. At the same time, Mr. Orphanides argued that the recent comments from the ECB were not overly hawkish as he expects inflation to remain rather low over the medium-term, and went onto say that market participants should not overreacted to the recent developments from the ECB as the economic outlook remains clouded with high uncertainty.

As European policy makers aim to restore investor confidence, the renewed vigor behind the EU could push exchange rate higher in the days ahead, but the group of policy makers may fall back to their lackadaisical approach as they struggle to meet on common ground. German Finance Minister Wolfgang Schaeuble argued that there is no immediate need for the EU to step up its efforts during an interview with the Deutschlandfunk radio, and noted that the bailout fund is large enough to handle whatever is under discussion in the short term as the region takes unprecedented steps to manage its public finances. As European policy makers struggle to restore investor confidence, the euro is likely to face additional headwinds over the near-term, and the EUR/USD may continue to retrace the sharp rally from the previous week as market participants speculate Spain and Portugal to share Ireland's ill fate. Nevertheless, the Bundesbank held an improved outlook in its monthly report and said that the rise in factory orders have considerably brightened the outlook for the first quarter, but the central bank went onto say that short-term indicators point to a moderation of the recovery speed as the expansion in global trade tapers off.

The British Pound advanced to a fresh monthly high of 1.5954 on Monday as home prices in the U.K. increased for the first time in three-months, and the rise in growth and inflation could push the exchange rate higher going forward as market participants speculate the Bank of England to start normalizing monetary policy later this year. However, Ernst & Young's Item Club said that the BoE should keep base rates where they are until it is clear that the economy is taking the fiscal adjustment in its stride, and noted that the MPC should hold its nerve as price growth is likely to approach 4% by the spring of 2011. As the tough austerity measures bear down of the recovery, the BoE certainly faces an uphill battle given the stickiness in price growth, and the central bank may turn increasingly hawkish over the coming months as policy makers expect inflation to remain elevated this year. In turn, the MPC may look to retain its wait-and-see approach as it aims to balance the risk for the region, but the GBP/USD may continue to pare the decline from back in November as interest rate expectations gathers pace.

The greenback lost ground on Monday, with the USD/JPY slipping to a low of 82.34, but a shift in market sentiment could produce increased volatility in the major exchange rates as the economic docket remains fairly light for the remainder of the day. However as the U.S. market remains closed for the MLK holiday, the currency market could face choppy price action going into the North American trade, and the dollar may consolidate over the next 12 hours of trading as market liquidity thins.