Euro Optimism Resurfaces, Sterling Propped Up By Less Dovish BoE

DailyFX   |  February 9 2012 10:00 EST

Risk appetite picked up on Thursday as Greece increased its effort to secure a second bailout package, and the developments coming out of the euro-area may continue to prop up market sentiment as European policy makers strike to avoid a default.

Talking Points

• Euro: Germany Prepares To Vote On Bailout, ECB To Preserve Dovish Tone
• British Pound: BoE Expands Asset Purchases To GBP 325B, Stronger Recovery Ahead

Euro: Greece Policy Makers Agree On More Austerity, ECB Turns More Dovish

The Euro advanced to fresh yearly high of 1.3320 as Greek policy makers agreed to the strict draft laid out by the Troika – the European Central Bank, the European Commission and the International Monetary Fund – but the single currency continues to face many hurdles as the ECB resists calls to take a haircut on its Greek debt holdings. Indeed, we’re supposed to see an official statement later today as European finance ministers convene in Brussels, and the development may send the euro higher as it dampens the risk for contagion.

However, as the ECB continues to highlight the ongoing weakness within the real economy, it seems as though the Governing Council will keep the door open to expand monetary policy further, and the dovish tone held by the central bank dampens the appeal of the single currency as the region faces a risk for a major economic downturn in 2012. As the EUR/USD struggles to break above the 100-Day SMA at 1.3337, it seems as though the bullish momentum is starting to taper off, and we will be keeping a close eye on the relative strength index for confirmation as it climbs to 64. Nevertheless, as we have the Euro-Zone 4Q GDP report on tap for the following week, the ECB has hinted at a dismal growth report in light of the slowing recovery, and we may see a sharp decline in the exchange rate as the data spurs speculation for more monetary easing.

British Pound: BoE Expands Asset Purchases To GBP 325B, Stronger Recovery Ahead

The British Pound advanced to a high of 1.5882 as the Bank of England softened its dovish tone for monetary policy, and the sterling may continue to recoup the losses from the previous year as the central bank strikes a more balanced outlook for the U.K. Although, the BoE increased its asset purchase program to GBP 325B, the central bank left out remarks supporting expectations for more quantitative easing, and it seems as though the MPC is a step closer in concluding its easing cycle as policy makers anticipate to see a stronger recover this year. In turn, the GBP/USD looks poised to make another run at the 200-Day SMA (1.5941), but we will keep a close eye on the relative strength index as it approaches overbought territory.

More to Follow...

--- Written by David Song, Currency Analyst

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