Talking Points

  • Euro: Merkel Sees More Measures Ahead, ECB Against More Bond Purchases
  • British Pound: Struggles To Hold Above 100-Day SMA, BoE Maintains Cautious Tone
  • U.S. Dollar: Weakness To Be Short-Lived As Flight To Safety Resurfaces

Euro: Merkel Sees More Measures Ahead, ECB Against More Bond Purchases

The Euro advanced to an overnight high of 1.3951 ahead of the EU Summit, and hopes surrounding the meeting may prop up the single-currency throughout as European policy makers increase their efforts to address the sovereign debt crisis once and for all.

However, German Chancellor Angela Merkel talked down expectations of finding a quick fix while speaking in Berlin and said that more measures will be need beyond today to stabilize the financial system.

Should European policy makers struggle to meet on common ground, the EU may become increasingly reliant on the European Central Bank to shore up the financial system, and we may see the Governing Council carry its easing cycle into the following year in an effort to balance the risks for the region. Meanwhile, ECB board member Juergen Stark argued that expanding the bond purchase program 'eliminates the incentive to direct policy towards reducing deficits,' and went onto say that the central bank must consider the long-term implications according to an interview with a German magazine. As the ECB tries to preserve its independence, the central bank may continue to talk down speculation of further expanding its nonstandard measures, but the Governing Council may have increased pressures to expand monetary policy further as the outlook for growth and inflation deteriorates. Indeed, the rebound in the EUR/USD may gather pace over the next 24-hours of trading as we expect to get a tentative plan on stemming the risk for contagion, but the relief rally may be short-lived should European policy makers move in their own interest. In turn, the EUR/USD could be carving out a near-term top around 1.3950, and the single-currency may give back the advance from earlier this month as the fundamental outlook for the euro-area remains bleak.

British Pound: Struggles To Hold Above 100-Day SMA, BoE Maintains Cautious Tone

The British Pound pared the overnight decline to 1.5969, but the sterling may face additional headwinds over the near-term as the Bank of England maintains a cautious outlook for the U.K. BoE Chief Economist Spencer Dale said the central bank remains 'very nervous' about the domestic economy according to an interview with a U.K. newspaper, and went onto say that inflation will slow 'sharply' over the following year as the region faces a slowing recovery. As policy makers see a higher risk of undershooting the 2 percent target for inflation, we may see the MPC continue to ramp up its asset purchase program over the coming months, and the central bank may look to ease monetary policy further in 2012 in an effort to stem the risk of a double-dip recession. As the near- the GBP/USD appears to be finding resistance around the 100-Day SMA at 1.6037, we may see a short-term correction unfold over the remainder of the week, and the pound-dollar may give back the advance from the previous week, which could produce a test of the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700.

U.S. Dollar: Weakness To Be Short-Lived As Flight To Safety Resurfaces

The U.S. dollar struggled to hold its ground on Wednesday as optimism surrounding the EU Summit spurred a rebound in risk, and the rise in market sentiment may gather pace throughout the North American trade as the U.S. market opens higher. However, investor confidence may taper off should the EU make an attempt to buy more time and we may see the reserve currency regain its footing over the remainder of the week as hopes of finding a quick fix deteriorate. In turn, the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) may continue to recoup the losses from earlier this month, and the gauge may resume the advance from the end of August as the flight to safety gathers pace.