Talking Points
Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction
British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate
U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace
Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction
The European Central Bank’s struck a cautious outlook in its monthly report and reiterated that the economic outlook remains tilted to the ‘downside’ as the region faces a slowing recovery. At the same time, ECB board member Jozef Makuch highlighted an increased risk of a double-dip recession, noting that the economy may contract over the medium-term should ‘downside risks materialize.
In addition, the EU warned that some commercial banks may need a 9 percent capital buffer to weather the ongoing turmoil within the financial markets, and we may see the ECB take additional steps to shore up the ailing economy as it aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, market participants still see the Governing Council scaling back the benchmark interest rate from 1.50 percent over the next 12-months, and the committee may carry its easing cycle into the following year as the outlook for growth and inflation deteriorate. As the near-term rally in the EUR/USD tapers off ahead of the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, the pullback from 1.3832 may gather pace over the remainder of the week, and the single-currency is likely to face additional headwinds over the near-term as European policy makers struggle to restore investor confidence. In turn, the near-term forecast for the Euro remains bearish, and the euro-dollar may threaten the rebound from 1.3145 as the fundamental outlook for the region deteriorates.
British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate
The British Pound struggled to hold its ground on Thursday as the Bank of England talked up speculation for additional monetary support, and the sterling may trade heavy over the coming days as the central bank maintains a highly dovish outlook for future policy. BoE board member Charles Bean said the central bank may ‘undertake further purchases’ as the region faces an increased risk of falling back into a recession, and went onto say that the European debt crisis risks could ‘lead to a seizing up of the financial system’ according to an interview with the Guardian newspaper. As the MPC steps up its effort to shield the U.K. economy, we may see a growing argument to expand the asset purchase program beyond the GBP 275B target, and speculation for further easing is likely to weigh on the exchange rate as market participants weigh the outlook for monetary policy. In turn, the GBP/USD may trade heavy ahead of the BoE minutes on tap for the following week, but the exchange rate may give back the rebound from 1.5273 should the central bank keep the door open to expand policy further.
U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace
The greenback gained ground following the shift in market sentiment, and the reserve currency may continue recoup the losses from earlier this week as it benefits from safe-haven flows. As the U.S. stock market opens lower, we should see risk aversion gather pace throughout the North American trade, and risk trends are likely to heavily influence price action for the major currencies as the economic docket remains fairly light for Thursday. As global policy makers continue to cast a dour outlook for global growth, the shift away from risk-taking behavior should gather pace over the remainder of the week, and the greenback may resume the upward trend from the previous month as the fundamental outlook for the global economy deteriorates.
