Talking Points

  •  Euro: Slovakia To Push Second Vote On EFSF, ECB Scales Back Hawkish Tone
  •  British Pound: Hits Fresh Monthly High, Consolidation Ahead
  •  U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC Minutes

Euro: Slovakia To Push Second Vote On EFSF, ECB Scales Back Hawkish Tone

Indeed, France pledge to aid its commercial banks that are unable to tap the financial markets, and we may see the EU take additional steps to support the financial system in an effort to stem the risk of a double-dip recession. At the same time, law makers in Slovakia are in talks about holding another vote on the European Financial Stability Facility, which is expected to take place in the coming days, and the increased effort to address the sovereign debt crisis should help to keep the Euro afloat as trader sentiment improves.

Meanwhile, the Organization for Economic Cooperation and Development floated the idea of lower borrowing costs in Europe, with Secretary General Angel Gurria noting that the European Central Bank has room to lower the interest rate from 1.50%, and we may see the Governing Council continue to scale back its hawkish tone for monetary policy as the region faces a slowing recovery. ECB board member Ewald Nowotny said he's more concerned about a 'relatively long phase of weaker growth' rather than the risk for inflation, and the central bank may show an increased willingness to scale back the rate hikes from earlier this year as the fundamental outlook for Europe deteriorates. Speculation for lower borrowing costs certainly dampens the appeal of the single-currency, and the relief rally in the EUR/USD may taper off in the days ahead as interest rate expectations falter. As the EUR/USD works its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, we may see the pair test the 'golden ratio' for resistance, and the exchange rate may consolidate over the near-term as market participants weigh the outlook for monetary policy.

British Pound: Hits Fresh Monthly High, Consolidation Ahead

The British Pound continued to recoup the losses from the previous month, with the exchange rate advancing to a fresh daily high of 1.5779, but the sterling may face headwinds in the following week should the Bank of England meeting minutes highlight an increased willingness to expand monetary policy further. Former BoE board member Sushil Wadhwani encouraged the central bank to conduct 'more creative' forms of policy to shore up the ailing economy, and we may see the MPC carry its easing cycle into the following year as Governor Mervyn King sees an increased risk of undershooting the 2% target for inflation. Speculation for additional monetary stimulus would instill a bearish outlook for the sterling and the GBP/USD may consolidate over the remainder of the week as market participants weigh the prospects for future policy. In turn, the pound-dollar may give back the rebound from 1.5273, and the exchange rate may fall back towards the 50.0% Fibonacci retracement from the 2009 low to high around 1.5250 as speculation for additional monetary support intensifies.

U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC Minutes

The greenback weakened against most of its major counterparts during the overnight trade, and the reserve currency may continue to lose ground throughout the North American session as market participants increase their appetite for yields. As equity futures foreshadow a higher open for the U.S. market, the rise in risk may gather pace during the day, but comments from the Federal Reserve may weigh on trader sentiment should the central bank turn increasingly cautious towards the world's largest economy. The FOMC meeting minutes is likely to highlight the ongoing weakness within the real economy, and the committee may keep the door open to conduct another round of quantitative easing as the U.S. faces a growing risk of a double-dip recession. In turn, we may see the policy statement spark a shift in risk sentiment, and a drop in risk appetite should fuel a rebound in the reserve currency as it benefits from safe-haven flows.