Talking Points

  • U.S. Dollar: Index Holds Support - Consumer Prices, Fed Chairman Bernanke On Tap
  • Euro: ECB Borrowing Hits Record In Spain, LTRO's Only Bought Time
  • British Pound: Sticky Inflation To Limit Dovish Tone, Upward Trend In Focus

U.S. Dollar: Index Holds Support - Consumer Prices, Fed Chairman Bernanke On Tap

The greenback bounced back on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to an overnight high of 9,944, and the reserve currency may appreciate further during the North American trade should the flight to safety gather pace. Beyond market sentiment, the economic docket is expected to show easing price pressures in the U.S., and a soft inflation report may dampen demands for the greenback as it raises the Fed's scope to ease monetary policy further.

Nevertheless, we may see New York Fed President William Dudley, who is also a voting member on the FOMC, continue to talk down speculation for more quantitative easing as he sees the recovery getting on a more sustainable path, but the market reaction may be short-lived as we have Fed Chairman Ben Bernanke on the wires at 17:00 GMT. As Fed officials continue to soften their dovish tone for monetary policy, we may see Mr. Bernanke strike a balance outlook for the region, but the central bank head may keep the door open to ease further in an effort to encourage a stronger recovery. Rather than looking at more asset purchases, the FOMC may consider extending 'Operation Twist' to further assist the housing market, and the central bank may continue to move away from its easing cycle as the fundamental outlook for the world's largest economy improves.

Euro:ECB Borrowing Hits Record In Spain, LTRO's Only Bought Time

The Euro weakened to 1.3142 as market participants scaled backed their appetite for risk, but the weakening outlook for the region continues to instill a bearish forecast for the EURUSD as European policy makers struggle to address the sovereign debt crisis. Indeed, a report by the Bank of Spain showed commercial banks borrowing a record EUR 227.6B in March, rising nearly 50% from the previous month, and the ongoing turmoil in the financial system may lead the European Central Bank to take additional steps in order to avoid a prolonged recession. As the ECB's Long Term Refinancing Operations appear to be having a limited impact on the real economy, Governing Council member Joerg Asmussen argued that the loans were an effort to buy time, and the central bank may have little choice but to stick to its easing cycle as the governments operating under the single currency become increasingly reliant on monetary support. Although the EURUSD seems to be carving a lower high around 1.3200, we may see 1.3300 come in as resistance as the figure lines up with the upper bounds of the descending triangle, and we anticipate to see a larger decline in the exchange rate as the bearish formation continues to take shape.

British Pound: Sticky Inflation To Limit Dovish Tone, Upward Trend In Focus

The British Pound showed a bullish reaction to the producer price report amid the higher-than-projected print, but the sterling struggled to hold its ground amid the shift away from risk-taking behavior. Nevertheless, the stickiness in price growth may keep the Bank of England on the sidelines as the central bank anticipates to see a stronger recovery later this year, and we may see the sterling track higher next week should the policy meeting minutes dampen expectations for more quantitative easing. Should the MPC continue to soften its dovish outlook for monetary policy, the shift in central bank rhetoric would support our bearish forecast for the GBPUSD, and the pair certainly looks poised to mark fresh highs for 2012 as it maintains the upward trend from earlier this year.

--- Written by David Song, Currency Analyst

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