- Euro: Outlook Weighted By Break-Up Threats, All Eyes On ECB
- British Pound: Maintains October Range Ahead Of BoE Rate Decision
- U.S. Dollar: Struggle Ahead of U.S. Election, Fed To Preserve Current Policy
Euro: Outlook Weighted By Break-Up Threats, All Eyes On ECB
The Euro is regaining its footing ahead of the European Central Bank interest rate decision as the Governing Council maintains a highly accommodative policy stance to address the risks surrounding the region, but the heightening threat for a euro-area breakup casts a bearish outlook for the single currency as the periphery countries struggle to get their house in order.
Headlines coming out of Greece continued to dampen the outlook for the Euro as the region weighs additional austerity measures to secure its next bailout payment, while policy makers in Italy argued that the country cannot afford to stay within the monetary union as the debt crisis continues to drag on the real economy.
At the same time, Spanish Prime Minister Mariano Rajoy disputed that the government needs to know ‘how much the spread will narrow’ on its public debt before it requests an official bailout, and we may see the governments operating under the singe currency put additional pressures on the ECB as they become increasingly reliant on monetary support. As the EU struggles to stem the threat for contagion, we should see central bank President Mario Draghi maintain a dovish tone for monetary policy, and the Governing Council may look to target the benchmark interest rate over the coming months as the euro-area faces a deepening recession.
As the EURUSD struggles to climb back above the 200-Day SMA (1.2528), we should see the double-top formation continue to take shape, and the pair looks poised to revert back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 should the ECB show a greater willingness to ease policy further.
British Pound: Maintains October Range Ahead Of BoE Rate Decision
The British Pound struggled to maintain the overnight advance to 1.5996 amid the slew of dismal data coming out of the U.K., but the sterling may regain its footing over the next 24-hours of trading as the Bank of England appears to be slowly moving away from its easing cycle.
Indeed, the BoE is widely expected to maintain its wait-and-see approach in November as the U.K. emerges from the double-dip recession, and we may see the Monetary Policy Committee soften its dovish tone for monetary policy as a growing number of central bank officials scale back their forecast for undershooting the 2% target for inflation.
As the GBPUSD preserves the range-bound price action carried over from the previous month, a shift in the policy outlook could spark another run at the 1.6200 figure, the 23.6% Fibonacci retracement from the 2009 low to high, and we may see the sterling outperform throughout the remainder of the year should the BoE introduce a more hawkish tone for monetary policy.
U.S. Dollar: Struggle Ahead of U.S. Election, Fed To Preserve Current Policy
The greenback lost ground ahead of the U.S. election, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,953, but the short-term rally in the reserve currency may continue to gather pace over the coming days as Fed officials soften their dovish tone for monetary policy.
As the world’s largest economy gets on a more sustainable path, we should seethe FOMC preserve its wait-and-see approach throughout the near to medium-term, and a growing number of central bank officials may start to discuss a tentative exit strategy as growth and inflation continues to pick up. In turn, we should see Fed Chairman Ben Bernanke talk down speculation for expanding the balance sheet further, and the central bank head may strike a more neutral tone for future policy as the U.S. faces a limited risk for a double-dip recession.
AiG Performance of Construction Index (OCT)
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GBP BRC Shop Price Index (YoY) (OCT)
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--- Written by David Song, Currency Analyst
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