Forex: Euro Rallies On Greek & Spanish Relief- Dovish ECB Ahead

RELATED QUOTES

SymbolPriceChange
GBPUSD=X1.2965-0.0002
USDJPY=X101.0770-0.008
EURUSD=X1.1219-0.0001

Talking Points

  • Euro: Greece To Buyback EUR 10B In Debt, Spain Makes Formal Request
  • British Pound: BoE To ‘Hold Indefinitely,’ 23.6% Fib In Sight
  • U.S. Dollar: Weighed By Risk Appetite, ISM Manufacturing To Cool Further

Euro: Greece To Buyback EUR 10B In Debt, Spain Makes Formal Request

The Euro continued to pare the decline from the previous month and advance to 1.3073 as Greece prepares to launch its debt repurchase program, but the relief rally in the EURUSD may taper off going into the European Central Bank (ECB) interest rate decision as the deepening downturn in the euro-area raises the prospects for further rate cut.

Greece pledged to buy back EUR 10B in debt issued earlier this year as part of the new relief package, but we may see the periphery country request additional assistance in the following year as the region is expected to contract another 4.5% in 2013. Indeed, the Bank of Greece warned that unemployment may exceed 26% as the region struggles to return to growth, and continued to highlight the ongoing turmoil in the banking system as the EU maintains a reactionary approach in addressing the debt crisis.

At the same time, there are reports that Spain has made a formal request for a bank bailout, which will be distributed in the week ahead, but hopes surrounding the single-currency may quickly fizzle should the new initiatives to save the monetary union fail to stem the risk for contagion.

Former ECB member Nout Wellink warned that the Outright Monetary Transactions (OMT) program may not be able to deliver the spreads Spanish Prime Minister Mariano Rajoy expects amid the ‘execution problems’ surrounding the non-standard measure, and went onto say Greece may need a ‘new program in 2014’ amid the ongoing threat of a government default.

As the debt crisis continues to drag on the real economy, speculation for another ECB rate cut may weaken the single currency ahead of the interest rate decision on tap for Thursday, and we may see the EURUSD make a failed run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low (1.3120) ahead of the policy meeting as the relative strength index struggles to clears interim resistance around the 66 figure.

British Pound: BoE To ‘Hold Indefinitely,’ 23.6% Fib In Sight

The British Pound broke out of the narrow range and rallied to 1.6086 amid the rebound in market sentiment, and the sterling may track higher throughout the remainder of the year as the Bank of England (BoE) is widely expected to carry a neutral policy stance into 2013.

Former BoE board member Adam Posen sees the Monetary Policy Committee (MPC) putting its asset purchase program on ‘hold indefinitely’ as the Funding for Lending scheme is expected to boost private sector activity, and anticipates to see a more hawkish central bank over the coming months as inflation is expected to hold above the 2% target over the next two-years.

As the BoE slowly moves away from its easing cycle, we should see the rebound from 1.5822 gather pace going into the end of the year, and we would need to see the GBPUSD clear the 23.6% Fib from the 2009 low to high around 1.6190-1.6200 to adopt a bullish outlook for 2013.

U.S. Dollar: Weighed By Risk Appetite,ISM Manufacturing To Cool Further

The greenback struggled to hold its ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tumbling to an low of 9,951, and the reserve currency may face additional headwinds during the North American trade as the economic docket is expected to show a slowing recovery in the U.S. economy.

As the ISM Manufacturing index is expected to reflect a slower rate of expansion in private sector activity, a marked decline in the survey may heighten bets for additional monetary support, but we may see risk trends play a greater role in driving price action across the currency market as headlines coming out of the euro-area fuels risk-taking behavior.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

ISM Manufacturing (NOV)

51.4

51.7

USD

15:00

10:00

ISM Prices Paid (NOV)

53.3

55

USD

15:00

10:00

Construction Spending (MoM) (OCT)

0.4%

0.6%

EUR

16:00

11:00

Euro-Area Finance Ministers Meet

EUR

16:00

11:00

Italian Budget Balance (euros) (NOV)

-13.1B

EUR

16:00

11:00

Italian Budget Balance (euros) (YTD) (NOV)

-58.5B

EUR

17:00

12:00

Italian New Car Registrations (YoY) (NOV)

-12.39%

USD

17:15

12:15

Fed's Eric Rosengren Speaks on U.S. Economy

USD

18:40

13:40

Fed's James Bullard Speaks on U.S. Economy

USD

22:00

17:00

Total Vehicle Sales (NOV)

14.80M

14.22M

USD

22:00

17:00

Domestic Vehicle Sales (NOV)

11.30M

11.10M

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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