Euro Optimism Bursts On Greek Impasse, Sterling Reversal On Tap

Talking Points

• Euro: Short-Term Reversal On Tap As Fears Of Greek Default Intensify
• British Pound: Finds Resistance, May Test 50.0% Fib On BoE Minutes
• U.S. Dollar: Index Eyes 61.8% Fib Ahead Of FOMC Rate Decision

Euro: Short-Term Reversal On Tap AsFears Of Greek Default Intensify

The Euro gave back the overnight advance to 1.3062 on fears of a Greek default, and we expect the short-term reversal to gather pace over the remainder of the week as European policy makers struggle to stem the heightening risk for contagion. At the same time, German Finance Minister Wolfgang Schaeuble talked down speculation of combining the European Financial Stability Facility with the European Stability Mechanism while speaking in Brussels, but went onto say that the new fiscal pact may be completed by the beginning of the following month as the EU increases its effort to restore investor confidence.

However, as European policy makers struggle to meet on common ground, we are likely to see the group make another attempt to buy more time, and the bearish sentiment underling the single currency should pick up over the near-term as the fundamental outlook for the region turns increasingly bleak. As a result, the governments operating under the monetary union are likely to become increasingly reliant on monetary support, but we may see a growing rift within the European Central Bank as the ballooning balance sheet comes under scrutiny. As the EUR/USD fails to push back above the 32.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, the pair certainly appears to have carved out a lower top in January, and we expect to see the euro-dollar fall back towards the 23.6% Fib around 1.2630-50 as the debt crisis continues to drag on trader sentiment.

British Pound: Finds Resistance, May Test 50.0% Fib On BoE Minutes

The British Pound pared the decline to 1.5532 amid the improved outlook for public finances, and the sterling may continue to outperform against its major counterparts as market participants treat the sterling as a safe-haven. As the Bank of England is widely expected to maintain the record-low interest rate for a prolonged period of time, the ongoing turmoil in the euro-area should continue to increase the appeal of the sterling, but the U.K. currency may face headwinds over the near-term as Britain faces an increased risk of slipping back into recession. As a result, the BoE is widely expected to ease policy further in 2012, and policy meeting minutes on tap for later this week could trigger a selloff in the GBP/USD as the central bank talks up speculation for more quantitative easing. As the pound-dollar struggles to clear 1.5600, it looks as though we will see a short-term reversal in the coming days, and the exchange rate should come up against the 50.0% Fib from the 2009 low to high around 1.5270-1.5300 to test for support.

U.S. Dollar: Index Eyes 61.8% Fib Ahead Of FOMC Rate Decision

The greenback firmed up on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,918, and the rebound should gather pace during the North American trade as the shift away from risk-taking behavior picks up. As the U.S. equity market opens lower, the reserve currency should continue to recoup the losses carried over from the previous week, and the USDOLLAR should work its way back towards the 61.8% Fib (9,947) as it continues to find support around the 50.0% Fib (9,828). However, as the Federal Open Market Committee kicks off its two-day meeting, the policy statement accompanying the rate decision is likely to spark increased volatility across the financial market, and the U.S. dollar may appreciate further over the next 24-hours of trading as we expect the FOMC to soften its dovish tone for monetary policy.

--- Written by David Song, Currency Analyst

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

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