Talking Points

• U.S. Dollar: Fiscal Deal Fuels Risk Appetite, ISM Manufacturing On Tap

• Euro: Maintains Range-Bounce Prices, RSI Divergence In Focus

• British Pound: Hits Five-Month High As U.K. Manufacturing Rebounds

U.S. Dollar: Fiscal Deal Fuels Risk Appetite, ISM Manufacturing On Tap

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 10,000, and the reserve currency may weaken further over the next 24-hours of trading should the Federal Reserve continue to strike a dovish tone for monetary policy.

Indeed, market participants increased their appetite for risk as the U.S. Congress struck a deal to avoid the ‘Fiscal Cliff,’ and the rise in trader sentiment may gather pace over the remainder of the week should the Federal Open Market Committee (FOMC) Meeting Minutes fuel speculation for additional monetary support.

After expanding the open-ended asset purchase program to $85B/month, the Fed may keep the door open to ease policy further amid the ongoing weakness in the labor market, but we may see the 2013 FOMC strike a more neutral tone as the economic recovery becomes more broad-based. As the ISM Manufacturing report is expected to show a rebound in business outputs, a positive development may curb bets for additional monetary support, and we may see the greenback regain its footing ahead of the highly anticipate U.S. Non-Farm Payrolls report as the fundamental outlook for the world’s largest economy improves.

Euro: Maintains Range-Bounce Prices, RSI Divergence In Focus

The Euro maintained the range-bound price action carried over from the previous year as the EURUSD fell back from an overnight high of 1.3292, and the pair appears to be carving out a near-term top ahead of the European Central Bank (ECB) interest rate decision on tap for next week as the Governing Council carries its easing cycle into 2013.

There’s speculation that the ECB will continue to shore up the real economy as the region faces a deepening recession, and we may see the central bank lower the benchmark interest rate further over the coming months as the headline reading for inflation is expected to slip below the 2% target this year. As the debt crisis continues to drag on the euro-area, we should see central bank President Mario Draghi preserve a cautious tone in 2013, and the single currency remains poised to face additional headwinds over the near-term as growth and inflation falters.

Beyond the fundamentals, the technical point to a near-term correction for the EURUSD as the relative strength index approaches overbought territory, and we will be keeping a close eye on the oscillator as there appears to be a bearish divergence taking place.