Euro Struggles As IMF Sees More Greece Aid, Sterling Bucks Trend

By David Song, Currency Analyst

Talking Points
  • Euro: IMF Fires Warning Shots On Greece, Head-and-Shoulders Top Still In Play
  • British Pound: BoE’s Miles Strikes Improved Outlook, RSI Maintains Downward Trend
  • U.S. Dollar: Index Pares Decline As Fed’s Dudley Takes Note Of Stronger Recovery

Euro: IMF Fires Warning Shots On Greece, Head-and-Shoulders Top Still In Play

The EURUSD slipped to a low of 1.3141 ahead of the Greek auction as investors prepare to settle as much as $3.2B in debt insurance, and the pair may continue to give back the rebound from the previous week as the fundamental outlook for the euro-area remains bleak. Indeed, International Monetary Fund warned Greece may need additional assistance should the region struggle to meet its ‘ ambitious fiscal and privatization targets ,’ and we may see European policy makers increase their efforts to address the sovereign debt crisis as the heightening risk for contagion continues to drag on investor confidence.

There’s speculation that the EU will combine the firepower of the European Financial Stability Mechanism with the European Stability Mechanism in an effort to prop up investor sentiment, but we may see the group become increasingly reliant on the European Central Bank as policy makers struggle to meet on common ground. In turn, the ECB may have little choice but to expand monetary policy further in 2012, and we maintain a bearish outlook for the EURUSD as it continues to carve a head-and-shoulders top in March. As the euro-dollar struggles to retrace the decline from earlier this month, we are waiting for a close below 1.3000 to see the reversal pattern take shape, and we should see the pair give back the advance from earlier this year, which would expose the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.

British Pound: BoE’s Miles Strikes Improved Outlook, RSI Maintains Downward Trend

The British Pound extended the advance from the previous week as the Bank of England struck an improved outlook for the region, and the sterling may continue to track higher this week should the policy meeting minutes talk down speculation for more quantitative easing. BoE board member David Miles said U.K. home prices should rise over the long-run amid ‘t he trend of rising real incomes and the likelihood of rising population density ,’ and we may see the central bank continue to soften its dovish tone for monetary policy as the MPC expects to see a more robust recovery in 2012. In turn, we may see the British Pound continue to recoup the losses from earlier this month, but we will be keeping a close eye on the relative strength index as it maintains the downward trend from earlier this year. As the BoE Minutes come into focus, we are likely to see the GBPUSD consolidate in the days ahead, but a less dovish statement could ultimately produce another run at the 23.6% Fib from the 2009 low to high around 1.6250 amid easing bets for additional monetary support.

U.S. Dollar: Index Pares Decline As Fed’s Dudley Takes Note Of Stronger Recovery

The greenback appears to be regaining its footing during the North American trade, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR ) bouncing back from an overnight low of 9,956, and the reserve currency may continue to track higher this as market participants scale back expectations for QE3. Indeed, New York Fed President William Dudley took note of the more robust recovery, stating that the developments coming out of the world’s largest economy has been ‘a bit more upbeat,’ and we should see the central bank continue to soften its dovish tone for monetary policy as the recovery gathers pace. In turn, market participants see scope for a rate hike in the next 12-months, which is well ahead of the 2014 pledge held by the FOMC, and the shift in the policy outlook paves the way for more USD strength as interest rate expectations improve.

--- 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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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/03/19/Euro_Struggles_As_IMF_Sees_More_Greece_Aid_Sterling_Bucks_Trend.html