DailyFX | November 13 2012 9:05 EST
The Euro bounced back from a two-month low as European policy makers talked down the risk for a Greek default, but the bearish sentiment surrounding the single currency may gather pace over the near-term as the EU persistently struggles to contain the debt crisis.
Euro: Holds Above 23.6% Fib As Germany Weighs Bundle Package For Greece
The Euro pared the decline to 1.2659 amid reports that Germany is weighing a bundled aid package for Greece, which could total more than EUR 44B, while Euro Group President Jean-Claude Juncker tried to talk down fears of a credit event in the periphery country and said that he’s ‘confident that the IMF will stay on board’ with Greece’s bailout plan as ‘there’s no real dispute’ on reducing the deficit.
At the same time, Greek Finance Minister Yannis Stournaras announced that the two-year extension to meet its budget target is ‘a done deal' as the government anticipates to receive the next tranche of the bailout payment later no later than early December, but the additional measures to keep the periphery in the monetary union may continue to dampen the long-term outlook for the euro-area as the debt crisis pushes the region into a deepening recession.
As the EU maintains a reactionary approach in addressing the risks surrounding the real economy, European policy makers may put more pressure on the European Central Bank (ECB) to ease policy further, and we may see the Governing Council continue to put its credibility and independence on the line as the governments operating under the single currency become increasingly reliant on monetary support.
As the EURUSD comes up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, the pair appears to be test the key figure for near-term support, but we will be keeping a close eye on the relative strength index as it maintains the downward trend carried over from back in September.
British Pound: U.K. CPI Exceeds Forecast, BoE Inflation Report In Focus
The British Pound advanced to 1.5914 as the headline reading for U.K. inflation topped market expectations, with the index advancing at an annualized pace of 2.7% in October, and the sterling remains poised to appreciate further over the remainder of the week as we anticipate the Bank of England (BoE) to soften its dovish tone for monetary policy.
As a growing number of BoE officials take note of the stickiness in consumer price growth, the quarterly inflation report may talk down the risk of undershooting the 2% target for inflation, and the central bank may strike an improved outlook for the British economy as the region emerges from the double-dip recession. In turn, we should see the Monetary Policy Committee preserve a neutral policy stance over the near to medium-term, and the bank may start to discuss a tentative exit strategy in the following year as the BoE sees a gradual recovery ahead.
Indeed, the quarterly inflation report could be the game-changer for the GBPUSD as forex traders weigh the policy outlook for the U.K., and a shift in central bank rhetoric may ultimately spark a bullish breakout in the exchange rate as the BoE appears to be slowly moving away from its easing cycle. As the GBPUSD maintains the downward trend from earlier this year, we would need to see a more meaning move towards 1.6300 to favor a more bullish forecast for the sterling, and we may see the British Pound outperform going forward amid the shift in the policy outlook.
U.S. Dollar: Holds Narrow Range, All Eyes On FOMC Minutes
The greenback tipped higher on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 9,986, but we may see the dollar hold steady ahead of the Federal Open Market Committee (FOMC) Meeting Minutes as market participants weigh the outlook for monetary policy.
As the world’s largest economy gets on a more sustainable path, we should see the policy statement sound less dovish this time around, and the Fed may strike a more upbeat tone this time around as policy makers continue to see a limited risk for a double-dip recession. However, the looming ‘fiscal cliff’ may become a growing concern for the central bank as the U.S. lawmakers struggle to meet on common ground, and the committee may keep the door open to expand its balance sheet further amid the uncertainties clouding the fundamental outlook for the region.
Monthly Budget Statement (OCT)
Fed's Janet Yellen Speaks on Central Banking
Retail Sales ex Inflation (QoQ) (3Q)
--- Written by David Song, Currency Analyst
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