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Forex: Euro Weighed By Rate Cut Expectations- Pound Looks To BoE

David Song

Talking Points

  • Euro: Germany Calls For More Easing, ECB To Maintain Easing Cycle
  • British Pound: Threatens Range Ahead Of BoE Inflation Report
  • U.S. Dollar: Pares Decline On Risk Aversion, U. of Michigan Confidence On Tap

Euro: Germany Calls For More Easing, ECB To Maintain Easing Cycle

The Euro continued to give back the rebound from earlier this year, with the EURUSD tumbling to a fresh monthly low of 1.2690, and the bearish sentiment surrounding single currency should gather pace over the near-term as the fundamental outlook for the region turns increasingly bleak.

Indeed, German policy makers floated the idea of lower borrowing costs across the euro-area as the region remains in a ‘very dangerous situation,’ while European officials continued to see little scope for finalizing Greece’s next bailout payment at the November 12 meeting as the government fails to strike a deal with the Troika – the European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF).

In response to the deepening downturn in Europe, ECB board member Jozef Makuch pledged that the central bank will ‘adjust the rates, in the direction which will be needed,’ and went onto say that the fundamental outlook is ‘worsening, but manageable’ as the Governing Council continues to embark on its easing cycle.

As the double-top formation on the EURUSD continues to take shape, we may see the pair come up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 to test for interim support, but the pair may continue to give back the rebound from the yearly low (1.2041) as the debt crisis pushes the euro-area back into recession.

British Pound: Threatens Range Ahead Of BoE Inflation Report

The British Pound threatened the range-bound price action carried over from the previous month even as the economic docket showed the U.K. trade deficit narrowing more-than-expected in September, but we may see the sterling regain its footing in the week ahead should the Bank of England (BoE) quarterly inflation report curb bets for additional monetary support.

Indeed, the BoE may scale back its forecast for undershooting the 2% target for inflation as the U.K. emerges from the double-dip recession, and the central bank may sound more hawkish this time around as the economic recovery gradually gathers pace.

In turn, we should see the Monetary Policy Committee slowly move away from its easing cycle, and the shift in the policy outlook should prop up the sterling throughout the remainder of the year as market participants scale back bets for more quantitative easing.

As the GBPUSD continues to pivot around the 1.5900 figure, we may see the pound-dollar consolidate going into the following week, and we will maintain a bullish forecast for the pair as the BoE looks to carry its wait-and-see approach into 2013.

U.S. Dollar: Pares Decline On Risk Aversion, U. of Michigan Confidence On Tap

The greenback pared the decline from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,978, but we may see the reserve currency consolidate throughout the North American trade as there appears to be a rebound in market sentiment.

As the economic docket is expected to show U.S. consumer confidence tracking higher in November, a positive development may encourage risk-taking behavior, but the ongoing improvement in the world’s largest economy should shore up the dollar over the near to medium-term as the limits the Fed’s scope to expand its balance sheet further.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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