Talking Points

  • U.S. Dollar: Index Rebounds From Key Support, Fed's Beige Book On Tap
  • Euro: Fitch Supports More ECB Purchases, All Eyes On President Mario Draghi
  • British Pound: Searches For Support Ahead Of BoE, Eyes 50.0% Fib

U.S. Dollar: Index Rebounds From Key Support, Fed's Beige Book On Tap

The reserve currency rallied across the board on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,016, and the greenback should continue to recoup the losses from earlier this week as we expect the Federal Reserve to hold an improved outlook for the United States. The Fed's Beige Book is anticipated to highlight a more robust recovery for 2012 as the developments coming out of the world's largest economy continue to exceed market expectations, and the papers could spark a bullish reaction in the USD as investors scale back speculation for another large-scale asset purchase program. As the USDOLLAR holds key support around the 61.8% Fibonacci retracement (9,947), we expect to see another run at the 78.6% Fib around 10,117, and the technical outlook points to a bullish breakout as the index continues to trade within an ascending triangle.

Euro: Fitch Supports More ECB Purchases, All Eyes On President Mario Draghi

The Euro slipped to an overnight low of 1.2680 and the single currency may weaken further ahead of the European Central Bank interest rate decision as market participants see additional monetary support on the horizon. Although the Governing Council is widely expected to keep the benchmark interest rate at 1.00%, the press conference with ECB President Mario Draghi is likely to weigh on the exchange rate as we expect the central bank head to maintain a dovish tone for future policy. Indeed, Fitch Ratings encouraged the ECB to further expand its asset purchase program in an effort to stem the risk for contagion, but we may see the Governing Council continue to move away from its nonstandard measures as the ballooning balance sheet comes under scrutiny. As the EUR/USD comes up against the 23.6% Fib retracement from the 2009 high to the 2010 low around 1.2630-50, the pair may test the monthly low (1.2665) for support, but we may see the exchange rate make a run at the 1.2500 level should the central bank lay the foundations for a zero interest rate policy.

British Pound: Searches For Support, Eyes 50.0% Fib

The British Pound fell to a fresh monthly low of 1.5366 amid the shift in risk sentiment, and we may see the GBP/USD make another run at the 50.0% Fib from the 2009 low to high (1.5270-1.5300) as the pair searches for support. As the fundamental outlook for the U.K. deteriorates, heightening fears of a double-dip recession is expected to drag on the exchange rate, and we anticipate to see the Bank of England ease monetary policy further in 2012 as central bank officials see an increased risk of undershooting the 2% target for inflation. In turn, the bearish sentiment underlining the sterling is likely to gather pace over the near-term, but the 50.0% Fib may continue to hold up as key support as we expect the BoE to maintain its current policy in January.

--- Written by David Song, Currency Analyst

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