Talking Points
- Euro: EU Unveils New Fiscal Pact, Moody’s Cuts Rating On French Banks
- British Pound: Producer Price Inflation Cools, Further Easing Ahead
Euro: Moody’s To Review EU Credit Rating, ECB To Stick To Standard Policy
The Euro tumbled to a low of 1.3229 after Moody’s highlighted an increased risk of seeing ‘multiple defaults by euro area countries’ paired with exits from the monetary union, and the single currency is likely to face additional headwinds over the coming days as the agency threatens to lower its credit rating for the euro-area. Indeed, it seems as though market participants are turning increasingly pessimistic towards the region as the new accord raises the risk of a deep recession, and we may see the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support as the economic recovery in Europe deteriorates.
However, Bundesbank President Jens Weidmann talked down speculation of seeing the European Central Bank expand its role in addressing the sovereign debt crisis, and it seems as though we will see the Governing Council continue to move away from its nonstandard measures as there appears to be a growing rift within the central bank. In turn, we may see ECB President Mario Draghi take the benchmark interest rate below 1.00% in 2012, but the board may have little choice but to further expand its asset purchase program as European policy maker struggle to restore investor confidence. As the EUR/USD gives back the rebound from 1.3145, the recent downturn in market sentiment could push the exchange rate below the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, and the euro-dollar looks poised to trade heavy over the remainder of the year as the fundamental landscape for Europe turns increasingly bleak.
British Pound: BIS Talks Down QE Impact, Slower Inflation On Tap
The British Pound bounced back from an overnight low of 1.5536, but the sterling may struggle to hold its ground over the next 24-hours of trading as the economic docket is expected to show easing price pressures in the U.K. As the headline reading for inflation is projected to increase at an annual pace of 4.8% in November after expanding 5.0% in the month prior, and the slower pace of price growth is likely to weigh on the exchange rate as market participants see the Bank of England further expanding its Asset Purchase Facility in the following year. However, the Bank of International Settlements argued that quantitative easing may have a limited impact in stimulating the economy as bond yields ‘are already very low,’ and warned that it may be difficult for the BoE to unwind its balance sheet ‘in a way that does not roil markets’ as investor confidence remains frail. Speculation for more QE instills a bearish outlook for the sterling, and we expect to see the GBP/USD weaken further over the coming days as the economic outlook for the U.K. falters.
More to Follow...
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
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FX Upcoming
Currency | GMT | EDT | Release | Expected | Prior | |
CAD | 18:00 | 13:00 | BoC Governor Mark Carney Speaks on Canadian Economy | |||
USD | 19:00 | 14:00 | Monthly Budget Statement (NOV) | -$140.0B | -$150.4B |
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