Forex: USD Correction To Gather Pace, Euro At Risk On ECB

Talking Points

• U.S. Dollar: Weighed By Risk Appetite, Fed's Beige Book On Tap
• Euro: Finland Renounces Greek Bailout, All Eyes On ECB

U.S. Dollar: Weighed By Risk Appetite, Fed's Beige Book On Tap

The U.S. dollar weakened against all of its major counterparts during the overnight trade, and the greenback may continue to give back the advance from earlier this month as market participants increase their appetite for yields. As we expect the Fed's Beige Book to highlight a weakened outlook for the world's largest economy, the survey could foreshadow an impending need for additional monetary stimulus, and speculation for another round of quantitative easing is likely to fuel risk, which should translate into more USD weakness. In light of the slowing recovery, the FOMC may employ a range of policy tools to stimulate the ailing economy, and the bearish sentiment underlying the greenback may gather pace as the Fed extends its easing cycle. With equity futures pointing to a higher open for the U.S. market, we should see the rebound in market sentiment carry into the North American trade, and the short-term correction in the greenback may pan out over the remainder of the week as market participants anticipate the central bank to expand its balance sheet further.

Euro: Finland Renounces Greek Bailout, All Eyes On ECB

The Euro pared the overnight advance to 1.4030 and the single-currency may trade heavy throughout the remainder of the day as heightening fears surrounding the sovereign debt crisis instills a weakened outlook for the region. Indeed, Finland's Prime Minister, Jyrki Katainen, said the country's participation in Greece's second bailout package ‘depends on the collateral issue,' while yields tied to Greek bonds rose to fresh record-highs as the deadlock amongst European policy makers bears down on investor confidence. As the EU struggles to meet on common ground, there appears to be an increased reliance on the European Central Bank to balance the risks for the region, and the Governing Council may step up its efforts to shore up the economy as the region faces a slowing recovery. As we expect ECB President Jean-Claude Trichet to soften his hawkish tone for monetary policy at the rate decision scheduled for Thursday, the single-currency may trade heavy over the next 24-hours of trading, and the EUR/USD may threaten the rebound from 1.3836 should the ECB show an increased willingness to delay its exit strategy further.

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