Forex: Euro Hopes To Fizzle, Sterling To Rally On Faster Inflation

DailyFX   |  November 12 2012 9:50 EST

The Euro bounced back ahead of the EUmeeting as Greece took additional steps to secure its next bailout payment, but the rebound in the single currency is likely to be short-lived as the debt crisis continues to dampen the fundamental outlook for the region.

Talking Points

• Euro: Greece Approves 2013 Budget, EU Meeting In Focus
• British Pound: Extends Decline Ahead Of U.K. CPI
• U.S. Dollar: Risk Trends To Dictate Prices Amid Holiday Trade

Euro: Greece Approves 2013 Budget, EU Meeting In Focus

The Euro bounced back from an overnight low of 1.2696 as Greek Prime Minister Antonis Samaras secured enough votes from the coalition government to approve the 2013 budget, but the bearish sentiment surrounding the single currency may gather pace over the near-term as the debt crisis continues to drag on the real economy.

Indeed, there’s budding hopes that the Troika – the European Union, European Central Bank and the International Monetary Fund – will release the next bailout payment for Greece following the new development, and increased efforts to tackle the debt crisis should help to prop up investor confidence as European policy makers push for greater integration.

As finance ministers across the euro-area convene later today to tackle the threat for a Greek default, headlines coming out of the meeting may push the EURUSD higher over the next 24-hours of trading, but the group may struggle to meet on common as Greece continues to seek a two-year extension in meeting its budget target.

As the EURUSD trades within Friday’s range, the pair looks poised to hold steady going into the EU meeting, and the pair could be setting up for a relief rally as the 30-minute relative strength index continues to hold above oversold territory. However, as the oscillator maintains the downward trend carried over from the previous month, we will preserve a bearish forecast for the EURUSD, and we may see the pair threaten the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it searches for support.

British Pound: Extends Decline Ahead Of U.K. CPI

The British Pound extended the decline from the previous week, with the GBPUSD tumbling to a fresh monthly low of 1.5864, but the recent weakness in the sterling may be short-lived as the economic docket is expected to show heightening price pressures in the U.K.

Indeed, the British Pound may regain its footing over the next 24-hours of trading as consumer prices in Britain are expected to expand at a faster pace in October, and the heightening risk for inflation should spark a bullish reaction in the GBPUSD as it dampens the Bank of England’s scope to expand its balance sheet further.

In turn, we may see the BoE scale back its forecast for undershooting the 2% target for inflation, and the sterling looks poised to resume the advance from earlier this year as the central bank appears to be gradually moving away from its easing cycle.

U.S. Dollar: Risk Trends To Dictate Prices Amid Holiday Trade

The greenback is struggling to hold its ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 9,961, and the reserve currency may weaken further during the North American trade as market participants raise their appetite for risk.

As the economic docket remains fairly light for the remainder of the day, risk trends should dictate price action across the major exchange rates, but the holiday session may produce thin trading conditions as U.S. traders remain offline in observance of Veterans Day.

FX Upcoming

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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