Euro Holds Major Trend Amid Weakening Outlook, Sterling Outperforms

DailyFX

Talking Points

  • Euro: Moody’s Watching Spain ‘Very Closely,’ Greece Running Short On Time
  • British Pound: Outperforms As U.K. Mortgage Approvals Rebound From 18-Month Low
  • U.S. Dollar: Fed’s Beige Book Saps Bet For QE3, Fed Chairman Bernanke In Focus

Euro: Moody’s Watching Spain ‘Very Closely,’ Greece Running Short On Time

The Euro fell back from an overnight high of 1.2562 as the rise in German unemployment paired with the drop in confidence heightened the threat for a prolonged recession, while Moody’s Investor Services said it’s watching Spain ‘very closely’ as the region remains at risk for further credit-rating downgrades. At the same time, Greece is certainly running out of time to nail out the details of its EUR 11.5B austerity packaged as the troika – the European Union, European Central Bank, and International Monetary Fund – is scheduled to be in Athens on September 7, while European Commission President Jose Barroso pledged to unveil the banking union proposal on September 12 as the group pushes for greater integration.

However, as the sovereign debt crisis dampens the outlook for the euro-area, we may see the governments operating under the money union continue to act in their own interest, and the EU may put increased pressure on the ECB to shore up the ailing economy as European officials struggle to meet on common ground. Although there’s speculation that the ECB will lay out its bond purchase program in greater detail at the September 6 meeting, the press conference with President Mario Draghi may fail to shore up the euro as there appears to be a growing rift within the Governing Council. Indeed, there are rumors that Bundesbank President Jens Weidmann may resign as the ECB puts its independence on the line, and the ongoing turmoil Europe continues to cast a bearish outlook for the single currency as policy makers struggle to contain the debt crisis. As the EURUSD continues to carve a lower top just below the 100-Day SMA (1.2586), we should see the downward trend from 2011 get carried into September, and the euro may ultimately give back the rebound from July (1.2041) as the fundamental outlook for the region turns increasing bleak.

British Pound: Outperforms As U.K. Mortgage Approvals Rebound From 18-Month Low

The British Pound climbed to 1.5873 as uptick in U.K. Mortgage Approvals raised the outlook for growth, and the sterling may continue to outperform against its major counterparts as the Bank of England sticks to its current policy. Indeed, the BoE is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and we may see Governor Mervyn King soften his dovish tone for monetary policy as the new lending scheme is expected to strengthen the recovery. As the GBPUSD persistently closes above the 10-Day SMA (1.5800), we should see the upward trending channel from July continue to take shape, but we will be keeping a close eye on the relative strength index as it approaches overbought territory.

U.S. Dollar: Fed’s Beige Book Saps Bet For QE3, Fed Chairman Bernanke In Focus

The greenback is trading heavy on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 9,992, and the reserve currency may continue to consolidate ahead of the holiday weekend as the Jackson Hole Economic Symposium takes center stage. Indeed, the Fed’s Beige Book struck a different tone from the FOMC Minutes as the central bank saw economic activity ‘gradually’ picking up in July and August, and it seems as though Fed Chairman Ben Bernanke will refrain from hinting at QE3 as the economy gets on a more sustainable path. In turn, the rebound from 9,938 may pickup going into September, and the central bank head may sound more upbeat this time around as the recent batch of data coming out of the world’s largest economy raises the outlook for growth.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

11:00

Kansas City Fed Manufacturing Activity Index (AUG)

5

EUR

18:00

14:00

ECB's Joerg Asmussen Speaks on Euro Economy

GBP

23:01

19:01

GfK Consumer Confidence Survey (AUG)

-27

-29

--- 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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