Talking Points

  • U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC
  • Euro: Merkel, Sarkozy To Meet With Papandreou - ECB On Tap
  • British Pound: Growth Prospects Improve, BoE To Maintain Current Policy

U.S. Dollar: Weighed By Risk Appetite, All Eyes On FOMC

The greenback lost ground on Wednesday as market participants increased their appetite for yields, and the rise in risk sentiment may carry into the North American trade as equity futures foreshadow a higher open for the U.S. market. Nevertheless, we may see the greenback consolidate ahead of the FOMC interest rate decision at 16:30 GMT, and the policy statement is likely to heavily influence the USD as the central bank is widely expected to maintain its current policy in November. As the Fed adopts a wait-and-see approach, we may see the dollar regain its footing later today, but the reserve currency may come under increased pressure should the central bank talk up speculation for another round of quantitative easing. However, the market reaction to the rate decision may not be clear cut as Fed Chairman Ben Bernanke is scheduled to hold the quarterly press conference at 18:15 GMT, and we may see the major currencies face whipsaw-like price action as investors mull over the prospects for the world's largest economy.

Euro: Merkel, Sarkozy To Meet With Papandreou - ECB On Tap

Efforts to contain the sovereign debt crisis continued to unravel as Greece plans to go through with the referendum, and the overnight rally in the EUR/USD is likely to be short-lived as the fundamental outlook for Europe deteriorates. German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet with Greek Prime Minister George Papandreou ahead of the Group of 20 Summit on tap for later this week, and the heightening risk for contagion may encourage the European Central Bank to ease monetary policy further as the region faces a growing risk of a double-dip recession. Although the ECB is widely expected to keep the benchmark interest rate at 1.50%, the central bank may see scope to further expand its nonstandard measures, and the Governing Council may carry its easing cycle into the following in an effort to stimulate the ailing economy. In turn, we should see the sharp reversal from 1.4246 gather pace over the near-term, and the EUR/USD may make another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100-10 to test for near-term support.

British Pound: Growth Prospects Improve, BoE To Maintain Current Policy

The British Pound pared the sharp decline from earlier this week to reach an overnight high of 1.6165, and the sterling may continue to gain ground over the near-term as the fundamental outlook for the U.K. improves. As the recent data coming out of the Britain reinforces a positive tone for future growth, we may see the Bank of England soften its dovish rhetoric for monetary policy, and the central bank may maintain its current policy throughout the remainder of the year as the economic recovery gradually gathers pace. In turn, we may see the GBP/USD extend the rebound from 1.5273, and the exchange rate looks poised to make another run at the 23.6% Fib from the 2009 low to high around 1.6200-20 should the MPC talk down speculation for additional monetary support.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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