Talking Points

  • Euro: EU To Meet On Greece In October, Rate Cut On Tap
  • British Pound: Rally Tapers Off As BoE Talks Up Speculation For More Monetary Support
  • U.S. Dollar: To Regain Footing As Risk Falters, All Eyes On Bernanke

Euro: EU To Meet On Greece In October, Rate Cut On Tap

European Commission President Jose Barroso said the EU should expedite the start of the permanent bailout fund while speaking in France, and went onto say that Greece will continue to operate under the fixed-exchange rate system as the group increases its efforts to address the debt crisis. In addition, the EU announced that it will conduct additional meetings next month in order to find a credible resolution for Greece, but the renewed efforts may be too little too late as the heightening risk for contagion continues to bear down on investor confidence.

In contrast, former European Central Bank Chief Economist Otmar Issing warned that Greece will be forced out of the monetary union as the country's debt is expected to reach 160% of GDP, and we are likely to see an increased reliance on the Governing Council to address the risks for the region as European policy makers struggle to meet on common ground. According to Credit Suisse overnight index swaps, market participants are pricing a 25bp rate cut for the policy meeting on tap for the following week, and the ECB may also expand its nonstandard measures in an effort to stem the ongoing turmoil within the financial system. As the EUR/USD continues to trade below 1.3700, it seems as though the rebound from 1.3362 is losing momentum, and the exchange rate may consolidate going into the end of the week as market jitters weigh on risk-taking behavior. In turn, we may see a short-term correction pan out in the coming days, but the single-currency may fade additional headwinds over the near-term should the ECB extend its easing cycle.

British Pound: Rally Tapers Off As BoE Talks Up Speculation For More Monetary Support

The British Pound fell back from an overnight high of 1.5676 and the sterling may continue to consolidate over the remainder of the day as it trades within the previous day's range. However, the near-term outlook for the Pound remains fairly bearish as Bank of England board member David Miles shows an increased willingness to ease monetary policy further, and we may see a greater push to expand the asset purchase program beyond the GBP 200B target as the region faces a growing risk of a double-dip recession. As the GBP/USD struggles to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700, the near-term rally appears to be tapering off, and the exchange rate may trend lower over the remainder of the week as the fundamental outlook for the U.K. deteriorates.

U.S. Dollar: To Regain Footing As Risk Falters, All Eyes On Bernanke

U.S. dollar price action was largely mixed during the overnight trade, but we may see the greenback regain its footing in the North American session as risk sentiment appears to be tapering off. In turn, we may see the USD recoup the losses from earlier this week, but comments from Fed Chairman Ben Bernanke may shake up the currency market as market participants weigh the outlook for future policy. Indeed, the central bank head may talk up speculation for additional monetary support given the slowdown in economic activity, and Mr. Bernanke may keep the door open to conduct another round on quantitative easing in an effort to encourage a sustainable recovery. In turn, currency traders may move away from the USD as speculation for QE3 resurface, and the greenback may trade heavy throughout the remainder of the week should the FOMC turn increasingly pessimistic towards the economy.