Talking Points

  • U.S. Dollar: Benefits From Flight To Safety, Chairman Bernanke On Tap
  • Euro: Remains Oversold, Further Weakness Ahead
  • British Pound: Eyes 50.0% Fib, Range-Bound Price Action Ahead

U.S. Dollar: Benefits From Flight To Safety, Chairman Bernanke On Tap

The greenback continued to gain ground against its major counterparts, which pushed the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) to a high of 10,120, and we should see the rise in risk aversion carry into the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for the rest of the day, risk trends should heavily influence price action for the major currencies, but comments from Fed Chairman Ben Bernanke could spark a shift in trader sentiment as market participants weigh the outlook for monetary policy. As Mr. Bernanke is scheduled to testify in front of Congress, the central bank may keep the door open to conduct another round of quantitative easing, and speculation for additional monetary support may dampen the appeal of the greenback as the FOMC looks to prolong its easing cycle. In turn, we may see a near-term correction unfold ahead of Friday's Non-Farm Payrolls report, but we may see the shift away from risk-taking behavior continue to materialize over the remainder of the year as the fundamental outlook for the global economy deteriorates.

Euro: Remains Oversold, Further Weakness Ahead

The Euro pared the overnight decline to 1.3145 as the EU increased its pledge to address the sovereign debt crisis, but the rebound may be short-lived as the ongoing turmoil within the financial system dampens the outlook for the region. Indeed, the European Central Bank saw overnight deposits from commercial banks reach the highest level since July 2010, and we may see the ECB take additional steps to shore up the real economy as the fundamental outlook for Europe turns increasingly bleak. In turn, the Governing Council is widely expected to scale back the rate hikes from earlier this year, and the recent selloff in the EUR/USD may gather pace as interest rate expectations falter. The rebound in the euro-dollar is likely to be short-lived as the relative strength index remains in oversold territory, and we may see the exchange rate continue to fall back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as it searches for near-term support.

British Pound: Eyes 50.0% Fib, Range-Bound Price Action Ahead

The British Pound extended the decline from the previous day to reach a fresh weekly low of 1.5366 and the sterling looks poised to threaten the rebound from 1.5327 as the fundamental outlook for the U.K. remains weak. The growing risk of a double-dip recession continues to spur expectations for additional monetary support, and the Bank of England may show an increased willingness to expand its asset purchase program beyond the GBP 200B target in order to stimulate the ailing economy. As the GBP/USD caries out a near-term top around the 38.2% Fib from the 2009 low to high around 1.5680-1.5700, the pair may come up against the 50.0% Fib around 1.5250, but we may see the pound-dollar consolidate over the near-term as market participants look forward to the BoE minutes, which are due out on October 19.