Forex Analysis: Euro Relief Rally To Fizzle- FOMC Minutes In Focus

Talking Points

• Euro: IMF Fires Warning Shots, ECB Call For Greater Integration

• British Pound: BoE Curbs Growth Forecast, Raises Inflation Outlook

• U.S. Dollar: Index Presses Key Figure, FOMC Minutes In Focus

Euro: IMF Fires Warning Shots, ECB Call For Greater Integration

The Euro advanced to an overnight high of 1.2755 as the EU increased its pledge to keep Greece in the monetary union, but the bearish sentiment surrounding the single currency is likely to gather pace as European policy makers maintain a reactionary approach in addressing the debt crisis.

Indeed, International Monetary Fund Managing Director Christine Lagarde continued to fire warning shots against Greece and said that the region needs a ‘real fix, not a quick fix,’ while Germany policy makers warned that the IMF may scale back its assistance for Greece as the periphery country continues to seek additional assistance.

As the governments operating under the fixed-exchange rate system become increasingly reliant on external support, European Central Bank board member Jozef Makuch argued that monetary policy can ‘not solve the reasons for the crisis,’ and argued that the region needs greater fiscal integration to ‘break the vicious circle’ as EU officials struggle to restore investor confidence.

Although the EURUSD appears to be finding trendline support off of the descending channel carried over from 2011, the fundamental outlook continues to cast a bearish outlook for the pair, and the recent rebound in the exchange rate is likely to be short-lived as the ongoing threat for contagion exacerbates the economic downturn in the euro-area.

British Pound: BoE Curbs Growth Forecast, Raises Inflation Outlook

The British Pound tagged a low of 1.5853 as the Bank of England (BoE) lowered its growth forecast for the U.K. and the sterling may face further declines over the near-term as the central bank keeps the door open to expand its balance sheet further.

However, the BoE scaled back its dovish outlook for inflation as the central bank now sees price growth approaching the 2% target over the near to medium-term, and we may see a growing number of Monetary Policy Committee (MPC) members strike a more neutral tone for monetary policy as they take note of the stickiness in consumer prices. In turn, we anticipate the MPC to carry its wait-and-see approach into the following year, but the bearish trending in the GBPUSD may continue to take shape as market participants maintain bet for more easing.

As the GBPUSD struggles to hold above the 100-Day SMA (1.5869), we may see the pair fallback towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680, but we will keep a close eye on the relative strength index as it approaches oversold territory.

U.S. Dollar: Index Presses Key Figure, FOMC Minutes In Focus

The greenback continued to track higher on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,993, and the reserve currency may track higher throughout the North American trade as forex traders scale back their appetite for risk.

Fears surrounding the U.S. ‘Fiscal Cliff’ may drag on the dollar, but the FOMC Minutes could prop up the reserve currency over the near-term as the world’s largest economy gets on a more sustainable path. Although Fed doves continue to float the idea of tying monetary policy to specific fundamental goals, the policy statement should take note of the resilience in private sector consumption along with the budding recovery in the housing market, and the recent uptick in employment may encourage a increased number of Fed officials to soften their dovish outlook as the recovery becomes increasingly broad-based.

Should the FOMC endorse a more neutral tone for monetary policy, the shift in central bank rhetoric may sap bets of seeing Operation Twist being extending in December, and the bullish sentiment surround the dollar should gather pace over the remainder of the year as the central bank moves back towards its transmission mechanisms to stimulate economic activity.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	15:00	10:00	Business Inventories (SEP)	0.4%	0.6%
EUR	15:45	10:45	ECB's Jorg Asmussen Speaks on Euro Economy
USD	19:00	14:00	Federal Open Market Committee Meeting Minutes
NZD	21:00	16:00	ANZ NZ Job Ads (MoM) (OCT)		-2.9%
NZD	21:30	16:30	Business NZ Performance of Manufacturing Index (OCT)		48.2

--- 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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