Forex: USD Outlook Hinges On FOMC Minutes- Euro Reversal Underway

RELATED QUOTES

SymbolPriceChange
GBPUSD=X1.6808+0.0006
USDJPY=X102.4050+0.1315
EURUSD=X1.3834+0.0002

Talking Points

  • U.S. Dollar: Continues to Benefit From Risk Aversion, FOMC Minutes In Focus
  • Euro: Private Lending Falters For Seventh Month, Bad Greek Loans Rise 50%
  • British Pound: Credit Availability Increased ‘Significantly,’ BoE to Switch Gears

U.S. Dollar: Continues to Benefit From Risk Aversion, FOMC Minutes In Focus

The greenback continued to appreciate on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,058, but we may see the reserve currency come under pressure should the Federal Open Market Committee (FOMC)Minutes fuel speculation for additional monetary support. As the FOMC implements a ‘qualitative guidance’ for monetary policy, the central bank may keep the door open to expand the open-ended asset purchase program beyond the $85B monthly limit, and the fresh batch of central bank rhetoric may dampen the appeal of the dollar as the committee continues to embark on its easing cycle.

However, we may see a growing number of central bank officials strike a more neutral tone this year as the economic recovery gradually gathers pace, and the reserve currency may continue to retrace the decline from 2012 should the central bank soften its dovish tone for monetary policy. Indeed, the 2013 FOMC may move to the sidelines amid the resilience in private sector consumption along with the budding recovery in the housing market, and we may see the central bank shift gears later this year as growth and inflation picks up.

Euro: Private Lending Falters For Seventh Month, Bad Greek Loans Rise 50%

The Euro failed to preserve the range-bound price action carried over from the end of the previous year as the EURUSD slipped to a low of 1.3080, and the single currency remains poised to face additional headwinds this year as the debt crisis continues to drag on the real economy.

The European Central Bank (ECB)said private sector loans contracted for the seventh consecutive month in November as the region faces a deepening recession, while a separate report showed commercial banks in Greece need an additional EUR 27.5B in capital as non-performing loans increased 50% to EUR 55B in 2012.

As the fundamental outlook for the euro-area turns increasingly bleak, we may see the ECB show a greater willingness to lower the benchmark interest rate further, and the near-term top around the 1.3300 figure encourages a bearish outlook for the single currency as the pair struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120. In turn, we may see the EURUSD give back the rebound from December (1.2875), and we will keep a close eye on the relative strength index as it comes back from overbought territory.

British Pound: Credit Availability Increased ‘Significantly,’ BoE to Switch Gears

The British Pound tumbled to 1.6144 even as the Bank of England (BoE)struck an improved outlook for the U.K., and the sterling may continue to consolidate over the remainder of the week as market sentiment falters.

A report by the BoE showed the availability of private sector credit in the U.K. increased ‘significantly’ during the fourth quarter, and went onto say that ‘lenders noted that the Funding for Lending Scheme had been an important factor behind this increase’ as the central bank maintains a highly accommodative policy stance.

As the U.K. emerges from the double-dip recession, we should see the BoE switch gears over the coming months, and the central bank remains poised to adopt a more hawkish tone in 2013 as the headline reading for inflation is expected to hold above the 2% target over the next two-years. Despite the recent selloff, we’re seeing the relative strength index on the GBPUSD coming up against interim support (50), and the pound-dollar may face a shallow correction in the days ahead as the fundamental outlook for the U.K. improves.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

19:00

14:00

Minutes of FOMC Meeting

USD

22:00

17:00

Total Vehicle Sales (DEC)

15.30M

15.46M

USD

22:00

17:00

Domestic Vehicle Sales (DEC)

11.70M

12.01M

AUD

22:30

17:30

AiG Performance of Service Index (DEC)

47.10

--- 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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