Talking Points

  • Japanese Yen: Weighed By Risk Appetite
  • British Pound: Holds Narrow Range Ahead Of BoE
  • Euro: Moody's Cuts Greece's Credit Rating
  • U.S. Dollar: Consumer Credit On Tap

The near-term rally in the Euro gathered pace on Monday, with the EUR/USD advancing to a fresh yearly high of 1.4035, and currency traders may continue to turn a blind eye to the sovereign debt crisis as the European Central Bank talks up speculation for a rate hike. According to Credit Suisse overnight index swaps, investors are pricing a 100 percent chance for a 25bp rate hike at the next meeting on April 7, and the rise in interest rate expectations may continue to fuel demands for the Euro as the central bank looks to curb the risk for price growth. In turn, the EUR/USD may continue to retrace the decline from back in November, and the exchange rate may work its way back towards the 2010 highs as European policy makers raise their outlook for growth and inflation.

Nevertheless, Moody's Investor Services held a negative outlook for Greece after cutting the region's credit rating to B1 from Ba1, and the risk for contagion is likely to intensify going forward as the governments operating under the fixed-exchange rate system face rising borrowing costs. As the EU struggles to meet on common ground, European policy makers may fail in addressing the debt crisis at the special summit on March 11, and the underlying weakness within the economy may bear down on the exchange rate as the region faces an uneven recovery. As a result, the rally in the Euro could be short-lived, and the single-currency may consolidate over the near-term as European policy makers struggle to restore investor confidence.

The British Pound fell back from an overnight high of 1.6340 to maintain the narrow range from the end of the previous week, and the GBP/USD may trend sideways ahead of the Bank of England rate decision on Thursday as investors weigh the outlook for future policy. The BoE is widely expected to maintain its current policy in March, but there could be a growing shift within the MPC as price pressures in the U.K. intensify. As market participants speculate the central bank to gradually normalize monetary policy this year, the GBP/USD looks poised to make a run at 1.6400 as it retraces the decline from back in 2009, and the rally in the pound-dollar may gather pace going forward as growth and inflation in the U.K. accelerates.

The U.S. dollar lost ground against most of its major counterparts, with the USD/JPY slipping to a low of 81.94, and the greenback may face additional selling pressures throughout the North American trade as investors raise their appetite for risk. However, as consumer credit in the world's largest economy is expected to increase another $3.400B in January after rising $6.099B in the month prior, the data could spark a bullish reaction in the greenback as the economic recovery gathers pace. The ongoing expansion in consumer credit is likely to instill an improved outlook for the region as private sector consumption remains one of the leading drivers of growth, and the Fed may continue curb speculation for another round of quantitative easing as the downside risks for the real economy diminish.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com