Euro Relief Rally To Fizzle, Pound Propped Up By Less-Dovish BoE

DailyFX

Talking Points

  • Euro: S&P Cuts Spain’s Credit Rating, IMF Calls For Greek Extension
  • British Pound: BoE’s Weale Strikes Hawkish Tone, Sees Above-Target Inflation
  • U.S. Dollar: Extends Decline Ahead Of Fresh Fed Rhetoric

Euro: S&P Cuts Spain’s Credit Rating, IMF Calls For Greek Extension

The Euro advanced to 1.2939 even as Standard and Poor’s cut Spain’s credit rating to BBB- from BBB+, and the headlines coming out of the G7 meeting in Tokyo may continue to prop up the single currency as European policy makers talk down the risk for a euro-area breakup.

Indeed, German Chancellor Angela Merkel said she would utilize the EU Summit scheduled for the following week to win back investor confidence, but the group of European policy makers may struggle to meet on common ground as the governments operating under the monetary union continue to act in their own interest.

As Greece fails to secure its next bailout payment, International Monetary Fund Managing Director Christine Lagarde argued that the EU should grant the region additional time to meet the budget target, and continued to endorse the idea for another haircut on Greek debt amid the weakening outlook for the region.

In response, German Finance Minister Wolfgang argued against the IMF, stating that another Greek debt restructuring would destroy ‘the preconditions for further guarantees or payments,’ and went onto say that the EU will wait for the Troika report before making any decisions on Greece. As the debt crisis continues to dampen the fundamental outlook for the region, the European Central Bank held a cautious tone in its monthly report, and the heightening threat for contagion should continue to press down on the exchange rate as the EU maintains a reactionary approach in addressing the debt crisis.

As the EURUSD remains supported by the 200-Day SMA (1.2820), the relief rally may spark another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around the 1.3120 figure, but the pair should continue to consolidate over the near-term as it fails to maintain the upward trend from the end of July. As the fundamental outlook for the region remains bleak, it will only be a matter of time before we see the 200-Day SMA give out, and we should see the pair come up against the 23.6% Fib around 1.2640-50 to test for interim support.

British Pound: BoE’s Weale Strikes Hawkish Tone, Sees Above-Target Inflation

The British Pound continued to pare the decline from earlier this week as the Bank of England softened its dovish tone for monetary policy, and the sterling may track higher ahead of the policy meeting minutes due out on October 17 as the central bank appears to be slowly moving away from its easing cycle.

BoE board member Martin Weale highlighted ‘the apparent stickiness of inflation’ during an interview with the Daily Mail newspaper, warning that above-target price growth ‘can lead to increased inflation risks and can affect the way in which people negotiate wages and set prices,’ and an increasing number of central bank officials may strike a more hawkish tone for monetary policy as the U.K. returns to growth.

As the BoE appears to be scaling back its forecast for undershooting the 2% target for inflation, the shift in the policy outlook fosters a bullish outlook for the sterling, and the GBPUSD looks poised to make another run at the 1.6300 figure as the relative strength index continues to come off of interim support.

U.S. Dollar: Extends Decline Ahead Of Fresh Fed Rhetoric

The greenback extended the decline from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) pushing down to a low of 9,898, but we may see the reserve currency regain its footing during the North American trade should Fed policy makers talk down speculation for additional monetary support.

As the developments coming out of the world’s largest economy encourages an improved outlook for growth, we may see a growing number of central bank officials sound more upbeat going into the end of the year, and we may see the FOMC endorse a wait-and-see approach over the near to medium-term as the recovery gradually gathers pace.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Fed's Jeremy Stein Speaks on Monetary Policy

USD

15:00

11:00

DOE U.S. Crude Oil Inventories (OCT 5)

-482K

USD

15:00

11:00

DOE U.S. Gasoline Inventories (OCT 5)

114K

USD

15:00

11:00

DOE U.S. Distillate Inventory (OCT 5)

-3689K

USD

15:15

11:15

Fed's Sarah Bloom Raskin Speaks on U.S. Economy

USD

16:30

12:30

Fed's Charles Plosser Speaks on U.S. Economy

USD

22:00

18:00

Fed's James Bullard Speaks on Monetary Policy, U.S. Economy

--- 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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