alking Points
Euro: ECB Liquidity Props Up Italy Bond Auction
British Pound: Carves Out Near-Term Top, Broad Range Still In Play
U.S. Dollar: Weakness To Be Short-Lived As Risk Sentiment Falters
Euro:ECB Liquidity Props Up Italy Bond Auction
The Euro advanced to 1.3079 following the bond auction in Italy, and the single currency may continue to gain ground ahead of the EUR 8.5B debt sale scheduled for Thursday as investor confidence improves. Indeed, Italy sold EUR 9B of six-month bills yielding 3.251%, which compares to the 6.504% offered back in the November, and easing finance costs may prop up the single currency over the next 24-hours of trading as it dampens the risk for contagion. It seems as though the extraordinary efforts taken by the European Central Bank has helped to calm market jitters, but the Governing Council may have to do more in 2012 as the fundamental outlook for the euro-area remains weak.
ECB board member Jens Weidmann said that the three-year liquidity program was ‘unusual’ but ‘necessary’ according to an interview with a German newspaper, and argued against ‘state financing with the central bank printing press’ as the central bank maintains its one and only mandate to ensure price stability. As the ECB continues to talk down speculation for a large-scale asset purchase program, we expect central bank President Mario Draghi to push the benchmark interest rate below 1.00% in the following year, but the Governing Council may have little choice but to further expand its nonstandard measures as the region braces for a ‘mild recession.’ As the EUR/USD maintains the downward trend from the end of October, the recent strength in the single currency is likely to be short-lived, and the exchange rate should continue to push lower over the near-term as European policy makers struggle to draw up a credible solution to address the sovereign debt crisis.
British Pound: Carves Out Near-Term Top, Broad Range Still In Play
The British Pound gave back the overnight advance to 1.5691 to maintain the narrow range carried over from the previous week, and the GBP/USD may continue to trend sideways ahead of the New Year as the fundamental outlook for the U.K. remains clouded with high uncertainty. As the pound-dollar struggles to trade above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700, the pair may have put in a near-term top this week, and we may see the pair make another run at 1.5400 as the exchange rate remains stuck within a broader range. However, as the Bank of England shows an increased willingness to expand its asset purchase program beyond the GBP 275B target, expectations for additional monetary support instills a bearish outlook for the British Pound, and the sterling may trade heavy throughout the first-half of 2012 as the slowing recovery in Britain dampens the appeal of the U.K. currency.
U.S. Dollar: Weakness To Be Short-Lived As Risk Sentiment Falters
The greenback struggled to hold its ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,929, but we may see the reserve currency regain its footing during the North American trade as the rebound in market sentiment tapers. As the U.S. equity market opens lower, it seems as though market participants are scaling back on risk-taking behavior, and we may see the reserve currency extend the advance from earlier this month as it continues to benefit from safe-haven flows. As the economic docket remains fairly light over the next 24-hours of trading, risk trends should dictate price action across the financial markets, and the drop in risk appetite could spark another flight to safety as the outlook for the global economy remains clouded with high uncertainty.
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.
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