Talking Points

  •  Euro: German, France Push For 'New Treaty - Italy To Vote On EUR 30B Relief Package
  •  British Pound: U.K. Services Pick Up, BoE to Maintain Current Policy
  •  U.S. Dollar: Weakens Across The Board, ISM Non-Manufacturing On Tap

Euro: German, France Push For 'New Treaty - Italy To Vote On EUR 30B Relief Package

The Euro advanced to 1.3485 as German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a 'new treaty,' while Italian Prime Minister Mario Monti unveiled a EUR 30B package to boost growth while cutting the budget deficit. As Italy's government is scheduled to vote on the new measures later today, a positive outcome should help the EUR/USD to retrace the selloff from Friday, but the relief rally may be short-lived as the European Central Bank maintains a cautious outlook for the region.

Indeed, the ECB is widely expected to lower the benchmark interest rate by another 25bp a head of the EU Summit, and we may see the central bank continue to move away from its nonstandard measure as its asset purchase program comes under increased scrutiny. In turn, policy makers in Europe may show an increased willingness to channel funds through the International Monetary Fund, financed by the central banks operating under the monetary union, but we may see investor confidence deteriorate further should the EU struggle to meet on common ground at the Summit scheduled for later this week. As the EUR/USD struggles to hold above the 20-Day SMA at 1.3482, we should see the downward trending channel continue to pan out in the days ahead, and the exchange rate may make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 should optimism surrounding the EU Summit deteriorate in the days ahead.

British Pound: U.K. Services Pick Up, BoE to Maintain Current Policy

The British Pound advanced to 1.5686 following the rise in market sentiment, and the sterling may continue to retrace the sharp decline from the previous month as the fundamental outlook for Britain improves. As service-based activity in the U.K. expands at a faster pace, the Bank of England may soften its dovish outlook for the region, and the central bank may preserve its wait-and-see approach in the beginning of the following year as policy makers expect to see a modest recovery in 2012. In turn, market participants may show a muted reaction to the BoE rate decision on tap for later this week, and we may see the GBP/USD consolidate over the near-term as market participants wait for the meeting minutes, which are due out on December 21. As market participants increase their appetite for risk, we may see the GBP/USD climb back above the 38.2% Fib from the 2009 low to high around 1.5680-1.5700, but the rebound could be short-lived should we see the 20-Day SMA (1.5725) hold up as resistance.

U.S. Dollar: Weakens Across The Board, ISM Non-Manufacturing On Tap

The greenback weakened against all of its major counterparts on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,854, and the rise in risk sentiment may gather pace during the North American trade as equity futures foreshadow a higher open for the U.S. market. At the same time, we're expecting service-based activity in the world's largest economy to expand at a faster pace in November, and a rise in the ISM Non-Manufacturing index may dampen the appeal of the USD as market participants continue to treat the reserve currency as a safe haven. As risk sentiment picks up ahead of the EU Summit, the greenback may struggled to hold its ground over the coming days, but hopes surrounding the meeting could be short-lived should European policy makers fail to meet eye-to-eye.

--- Written by David Song, Currency Analyst