Euro To Take Cues From ECB, Bullish Sterling Outlook Supported By BoE

DailyFX

Talking Points

  • Euro: EU Pushes For Greater Integration, Germany Calls For Veto Powers
  • British Pound: U.K. Services Cool, Looking For Trendline Support Ahead Of BoE
  • U.S. Dollar: ADP Tops Forecast- FOMC Minutes, NFPs In Focus

Euro: EU Pushes For Greater Integration, Germany Calls For Veto Powers

The EURUSD pared the overnight decline to 1.2876 as the European Commission talked up speculation for greater integration and pledged to draw up a ‘integrated budgetary framework’ in the autumn, but we may see the group struggle to meet on common ground as the governments operating under the monetary union continue to act in their own interest.

Indeed, Germany’s Christian Social Union party argued that the Bundesbank should be allowed to veto the European Central Bank’s unlimited bond-buying program in an effort to ensure ‘monetary stability in Europe,’ and the Governing Council may come under increased scrutiny as the non-standard measure only helps to buy time.

Although the ECB is widely expected to keep the benchmark interest rate at 0.75% in October, President Mario Draghi is likely to sound increasingly dovish as the region faces a deepening recession, and the central bank may now look to target the benchmark interest rate as growth and inflation falter. In turn, the rebound from the weekly low (1.2802) may be short-lived, and the EURUSD may threaten the bullish trend from the end of July should the Governing Council show a greater willingness to cut borrowing costs further. We would like to see a close below the 200-Day SMA (1.2820) to reinforce our bearish forecast for the EURUSD, and the pair should continue to give back the advance from earlier this year as the debt crisis continues to dampen the outlook for the real economy.

British Pound: U.K. Services Cool, Looking For Trendline Support Ahead Of BoE

The British Pound is struggling to hold its ground ahead of the Bank of England interest rate decision as the economic docket showed service-base activity in the U.K. expanding at a slower pace during September, but the shift in the policy outlook should help to prop up the sterling as the central bank appears to be slowly moving away from its easing cycle.

Market participants see the BoE preserving its current policy in October as the U.K. appears to be emerging from the double-dip recession, and the Monetary Policy Committee may strike a more neutral tone for monetary policy as central bank officials no longer see a risk of undershooting the 2% target for inflation.

However, we may see a fairly muted reaction to the rate decision should the MPC refrain from releasing a policy statement, and we may see the British Pound continue to consolidate ahead of the BoE Minutes due out on October 17 as market participants weight the prospects for future policy. As the GBPUSD comes up against the ascending channel carried over from July, we may see former trendline resistance act as new support, and the pair may track higher over the near to medium-term as the BoE softens its dovish tone for monetary policy.

U.S. Dollar: ADP Tops Forecast- FOMC Minutes, NFPs In Focus

The greenback pushed higher on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,923, and the reserve currency may appreciate further during the North American trade as the fundamental outlook for the world’s largest economy improves.

Indeed, the ADP employment report showed a 162K in September amid forecasts for a 140K print, and the rise in private payrolls may generate a strong Non-Farm Payroll figure as the recovery gradually gathers pace.

However, the FOMC Minutes on tap for Thursday may dampen the appeal of the dollar as the central bank keeps the door open to expand its balance sheet further, and we would need to see the Fed promote a more balanced tone for future policy to see the short-term rebound in the USDOLLAR turn into a larger correction.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

ISM Non-Manufacutring Composite (SEP)

53.2

53.7

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (SEP 28)

-2446K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (SEP 28)

-481K

USD

14:30

10:30

DOE U.S. Distillate Inventory (SEP 28)

-482K

--- 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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