Forex: EUR/USD Rebound To Be Short-Lived

 
article by David Song

Euro: EU Holds Cautious Outlook, ECB Advocates Stronger EFSF

The Euro extended the advance from earlier this week to reach a high of 1.3824, but the short-term correction may taper off in the days ahead as the fundamental outlook for Europe deteriorates. Indeed, the European Union saw a risk that the economy may come 'close to stand-still' towards the end of the year, and lowered its forecast for inflation as the balance of risk remains tilted to the downside. The statement reinforced the cautious tone held by the European Central Bank and there seems to be an increased reliance on the ECB to address the risks for the region as the ongoing turmoil within the financial system bears down on the real economy. In response, ECB board member Ewald Nowotny encouraged the EU to quickly strengthen the European Financial Stability Facility, and went onto say that the central bank may have to reconsider its bond purchases should policy makers fail to broaden the scope of the bailout fund.

In light of the recent comments, it seems as though the Governing Council has little choice but to delay its exit strategy further and the central bank may continue to soften its tone for monetary policy as the fundamental prospects for Europe deteriorates. As the rebound in the EUR/USD fails to produce a test of the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900, we may see the euro trade heavy throughout the remainder of the week, and the single-currency is likely to face additional headwinds over the near-term as the heightening risk for contagion continues to bear down on market sentiment. In turn, the euro-dollar may fall back towards the 50.0% around 1.3500, and the exchange rate may trend sideways in the days ahead as investors weigh the outlook for future policy.

U.S. Dollar: Fed, ECB, BoE, BoJ, SNB To Increase Dollar Liquidity, All Eyes on FOMC

The U.S. dollar tumbled lower against its major counterparts as the European Central Bank announced, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan, and the Swiss National Bank, plans 'to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year.' As the development props up market sentiment, the greenback may continue to trade heavy throughout the North American trade, and the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) may continue to give back the advance from earlier this month as investors diversify away from the reserve currency. As equity futures foreshadow a higher open for the U.S. market, the rebound in risk appetite looks poised to gather pace over the next 24-hours of trading, and the bearish sentiment underlying the greenback may carry into the week ahead as the FOMC is scheduled to review a broad range of policy tools to stimulate the ailing economy.

British Pound: BoE Endorses Further QE, Threatening The Rebound

The British Pound advanced to a high of 1.5854 following the better-than-expect U.K. retail sales report, and the rebound in the GBP/USD looks poised to gather pace as the relative strength index bounces back from oversold territory. However, Bank of England board member Martin Weale held a cautious outlook for the region, stating that the fundamental outlook for has worsened from July, and saw a higher risk of a double-dip recession, which raises the scope of seeing a growing rift within the MPC. In turn, the BoE minutes could highlight an increased willingness to expand the asset purchase program beyond the GBP 200B target, and speculation for additional monetary stimulus dampens the outlook for the sterling as interest rate expectations falter. In turn, the rebound from 1.5705 may be short-lived should the BoE strike a very dovish tone for monetary policy, and the pound-dollar may continue to give back the rebound from earlier this year as the central bank looks to extend its easing cycle.