Forex: Euro Getting Overbought- Pound To Benefit From BoE Minutes

Talking Points

• Euro: Spain Sells EUR 3.52B In Debt, Bad Loans Hit Record High

• British Pound: U.K. Inflation Holds At 2.7%, BoE Minutes In Focus

• U.S. Dollar: Holds Tight Rate Amid Light Calendar, Fed’s Fisher On Tap

Euro: Spain Sells EUR 3.52B In Debt, Bad Loans Hit Record High

The Euro rallied to a fresh monthly high of 1.3188 as Spain sold EUR 3.52B in short-term debt, with the six-months bills yielding 1.6309% versus the 1.669% offered last month, but the ongoing threat for contagion may produce further headwinds for the single currency as the periphery countries struggle to get their house in order.

Indeed, EU Economic and Monetary Affairs Commissioner Olli Rehnencouraged Spain to take additional steps in reducing its budget deficit as the risk of fiscal stress ‘remains rather elevated,’ while a separate report showed the ratio of bad loans to overall lending in Spain increased to a record 11.23% in October as the region struggles to emerge from the recession.

As the economic downturn in the euro-area dampens the outlook for price stability, there’s speculation that the European Central Bank (ECB) will continue to target the benchmark interest rate in 2013, but we may see the Governing Council stick to the sidelines at the January 10 meeting as policy makers see the economy returning to growth in the second-half of the following year.

ECB board member Yves Mersch said rate cut expectations may be overstated as the Governing Council now primarily relies on its non-standard measures to address the risks surrounding the region, but we may see a growing number of central bank officials look to target the benchmark interest rate as the headline reading for inflation is expected to fall below the 2% target in 2013.

Although the EURUSD looks poised to make a run at the 1.3200 figure, we’re seeing the relative strength index come up against overbought territory, and the pair may face a short-term correction over the next 24-hours of trading should the oscillator fail to push above the 70 region.

British Pound: U.K. Inflation Holds At 2.7%, BoE Minutes In Focus

The British Pound continued to pare the decline from September, with the GBPUSD climbing to a fresh monthly high of 1.6225, and the sterling looks poised to make a run at the 1.6300 figure as we anticipate the Bank of England (BoE) to soften its dovish tone for monetary policy.

Indeed, consumer prices in the U.K. increased another 2.7% in November to mark the fastest pace of growth since May, and sticky price growth may prompt the Monetary Policy Committee to shift gears in 2013 as the central bank expects inflation to hold above the 2% target over the next two-years. In turn, we should see the BoE Minutes talk down speculation for additional monetary support, and the central bank may sound more hawkish this time around as the U.K. emerges from the double-dip recession.

Although we’re seeing the relative strength index on the GBPUSD approach overbought territory, we will look for further advances in the exchange rate as the oscillator maintains the upward trend carried over from the previous month, and the sterling remains poised to outperform throughout the remainder of the year amid the shift in the policy outlook.

U.S. Dollar: Holds Tight Rate Amid Light Calendar, Fed’s Fisher On Tap

The greenback continued to consolidate on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) holding within the previous day’s range, and the reserve currency may continue to track sideways going into the middle of the week as the economic docket remains fairly light over the next 24-hours of trading.

Nevertheless, we do have Dallas Fed President Richard Fisher scheduled to speak later today, and we should see the central bank hawk talk down bets for additional monetary support as the economy gets on a more sustainable path. As the economic recovery becomes more broad-based, we should see the FOMC stick to the sidelines in 2013, and a growing number of central bank officials may strike a more neutral tone for monetary policy as

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	15:00	10:00	NAHB Housing Market Index (DEC)	47.0	46.0
USD	18:15	13:15	Fed's Richard Fisher Speaks on U.S. Economy
NZD	21:45	16:45	Current Account Balance (3Q)	-4.400B	-1.797B
NZD	21:45	16:45	Current Account Deficit-GDP Ratio (3Q)	-4.8%	-4.9%
AUD	23:30	18:30	Westpac Leading Index (MoM) (OCT)		0.7%

--- Written by David Song, Currency Analyst

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

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