Talking Points

  • Euro: Correction Gathers Pace, All Eyes On Italy Austerity Vote
  • British Pound: BoE Posen Pushes For An Additional GBP 100B in QE
  • U.S. Dollar: Loses Ground, Weighed By Risk Appetite

Euro: Correction Gathers Pace, All Eyes On Italy Austerity Vote

Although Italy's lower house of parliament is scheduled to vote on the EUR 54B austerity plan on Wednesday, there were reports that Finance Minister Giulio Tremonti met with the chairman of China Investment Corp last week, and European officials may continue to seek international assistance as the heightening risk for contagion dampens the outlook for the region. At the same time, there were market rumors that the European Central Bank participated in Italy's 5-Year debt auction, where the treasure sold EUR 3.9B in government debt yielding 5.60%, which compares to the 4.93% offered back in July. As there's an increased reliance on the ECB to address the risks for the region, we are likely to see the central bank continue to soften its hawkish tone for future policy, and President Jean-Claude Trichet may open the door for additional monetary support before he leaves the helm in November.

Indeed, the EUR/USD appears to have found near-term support around the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, and the rebound may gather pace over the next 24-hours of trading as the relative strength index bounces back from a low of 27. However, should the RSI hold in oversold territory, we may see the exchange rate extend the decline from earlier this month, and the pair may continue to give back the advance from earlier this year as the fundamental outlook for the euro-area deteriorates.

British Pound: BoE Posen Pushes For An Additional GBP 100B in QE

The British Pound slipped to a fresh monthly low of 1.5760 despite the heightening risk for inflation, and the sterling may continue to trade heavy in the days ahead as the Bank of England looks to expand monetary policy further. BoE board member Adam Posen argued that the GBP 200B asset purchase program may have to be increased by another GBP 100B as the region faces a slowing recovery, and saw a risk of undershooting the 2% target for inflation as the central bank curbs its outlook for future growth. In turn, the BoE minutes due out on September 21 could reveal a growing rift within the MPC, and the committee may show an increased willingness to provide additional monetary support in an effort to balance the risks for the region. As the RSI dips into oversold territory, the recent decline in the GBP/USD looks poised to gather pace in the days ahead, and the exchange rate may threaten the rebound from late-January (1.5750) as the BoE continues to talk down speculation for higher inflation.

U.S. Dollar: Loses Ground,Weighed By Risk Appetite

The U.S. dollar has started to give back the recent gains, with the Dow Jones-FXCM index (Ticker: USDOLLAR) falling back from an overnight high of 9790, and the reserve currency may continue to lose ground throughout the North American trade as equity futures now project a higher open for the U.S. market. The shift in market sentiment could spur a sharp reversal across the major currencies, but the rise in risk appetite could be short-lived as the fundamental outlook for the global economy falters. In turn, the near-term correction in the USD may taper off going into the middle of the week, and the greenback may regain its footing in the days ahead as investor confidence remains fragile.