Talking Points
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Euro: Economic Confidence Improves, Private Lending Contracts
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British Pound: BoE Talks Down Bets for More QE, Negative Interest Rates
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U.S. Dollar: Durable Goods Disappoint, Pending Home Sales on Tap
Euro: Economic Confidence Improves, Private Lending Contracts
The Euro climbed to an overnight high of 1.3121 as economic confidence in Europe rose to a nine-month high, but we’re seeing the EURUSD struggle to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the debt crisis continues to drag on the real economy.
Beyond the negative developments coming out of Italy, a report by the European Central Bank (ECB) showed private sector credit contracting for the ninth consecutive month in December, and the ongoing weakness in lending may ultimately produce a prolonged recession in the euro-area as European policy makers scale back their forecast of seeing the region return to growth.
As the economic downturn threatens price stability, we should see the ECB take additional steps to shore up the ailing economy, and the Governing Council may show a greater willingness to push the benchmark interest rate to a fresh record-low as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.
As the EURUSD fails to trade back above former resistance, the pair should continue to give back the rebound from the November low (1.2659), but we will need to keep a close eye on the relative strength index as it approaches overbought territory. Nevertheless, we will look to sell rallies in the EURUSD as it breaks out of the upward trend carried over from the previous year, and the bearish sentiment surrounding the single currency should gather pace over the near to medium-term as the fundamental outlook for the region turns increasingly bleak.
British Pound: BoE Talks Down Bets for More QE, Negative Interest Rates
The British Pound advanced to 1.5169 as Bank of England (BOE) board member Charles Bean talked down speculation for negative interest rates in the U.K., while former central bank official Adam Posen expects Governor Mervyn King to refrain from enacting additional monetary stimulus as policy makers see a slow and sustainable recovery ahead.
Despite calls to adopt a nominal growth target for monetary policy, Mr. Bean argued that ‘the hurdle for change should be high’ as inflation is expected to above the 2% target over the policy horizon, and saw scope to start normalizing monetary policy ‘once the economy is in a better position.’