Talking Points

  • Euro: Portugal Bailout Under Review, Recovery Slows
  • British Pound: BoE To Carry Current Policy Into 2012
  • U.S. Dollar: ISM Manufacturing On Tap, Debt Vote Comes Into Focus

The Euro extended the advance from Friday to reach an overnight high of 1.4452, but the uncertainties clouding the economic outlook may bear down on the single-currency should the European Central Bank continue to soften its hawkish tone for monetary policy. According to a report by Reuters, the EU and the International Monetary Fund will review the EUR 78B bailout package for Portugal, and the group may weigh additional measures to stem the risk for contagion as policy makers struggle to restore investor confidence. At the same time, a German newspaper said the EU briefly brought up the idea of increasing the European Financial Stability Facility while looking to broaden its powers and the ongoing turmoil in Europe could heighten the need for increased funds as the region faces a slowing recovery.

As economic activity across the euro-area abates, the ECB is widely expected to hold the benchmark interest rate at 1.50% later this week, and central bank President Jean-Claude Trichet may talk down speculation for higher borrowing costs in light of the recent developments coming out of the region. Nevertheless, market participants are still see the interest rate increasing by 25bp over the next 12-months according to Credit Suisse overnight index swaps, but dovish comments from the Governing Council would weigh on the exchange rate as rate expectations falter. Should the EUR/USD struggle to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.440-60, we could see a exchange rate pare the two-day rally as it continues to trade within a descending triangle, and the single-currency may trade heavy going into the middle of the week as the ECB rate decision comes into focus.

The British Pound lost ground following the unexpected contraction in U.K. manufacturing and the sterling may continue to consolidate throughout the North American trade as the economic outlook for the region deteriorates. According to the Confederation of British Industry, the Bank of England is expected to carry its current policy into 2012, and the group sees the region growing at an annualized rate of 1.3% this year, which compares with an initial forecast for a 1.7% expansion back in May. As growth and inflation cool, the BoE may no longer see a need to lift the benchmark interest rate off of 0.50%, and we may see a growing shift within the MPC as policy makers struggle to stimulate the ailing economy. As the BoE preserves a wait-and-see approach, the GBP/USD is likely to trade within a broad range for the remainder of the year, but the sterling could face increased selling pressures over the near-term should the central bank show an increased willingness to expand its asset purchase program beyond the GBP 200B target.

The U.S. dollar came under pressure during the overnight trade and the greenback lose ground throughout the North American trade as the rebound in risk appetite saps demands for the reserve currency. However, as we're expecting to see a slew of dismal data coming out of the world's largest economy, the developments could weigh on market sentiment, but the vote on the debt ceiling will certainly take center stage as policy makers try to avert a default. Despite the bipartisan agreement reached by Congress, it seems as though the U.S. remains at risk of losing its highly coveted AAA credit rating, and market participants may continue to diversify away from the greenback as the economic outlook deteriorates.