Dollar, Euro and Pound Stability in Question

Analysts are forecasting instability for the U.S. dollar as the anticipated recovery of the country stalls and more risk enters the market. For now, the appetite for risk …

Analysts are forecasting instability for the U.S. dollar as the anticipated recovery of the country stalls and more risk enters the market. For now, the appetite for risk seems high, but unflinching Federal Reserve policy and government gridlock is expected to change that. The euro is also in peril as the European Union discusses a second bailout package for Greece and Italy voices debt woes. Meanwhile, the British pound is showing stability, but may see trouble stemming from global pressures and a sore economy. For more on this continue reading the following article from The Street.

Talking Points

  • U.S. Dollar: Shows Muted Reaction To Data, Risk Trends To Drive Prices
  • Euro: Italy Austerity Vote, Bank Stress Test On Tap
  • British Pound: All Eyes On BoE Minutes

The U.S. dollar continued to lose ground on Thursday and risk trends are likely to drive price action throughout the North American trade as market participants show a fairly muted reaction to the mixed batch of data coming out of the world’s largest economy. Although we saw a rebound in household spending, the slower pace of growth in producer prices suggests the consumer price report tomorrow will reflect a softer outlook for inflation, and the central bank may continue to carry a dovish tone over the remainder of the year as the nation faces a protracted recovery.

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As Fed Chairman Ben Bernanke is scheduled to deliver the second-half of the semi-annual monetary policy report today, we are likely to see the central bank reiterate the comments from the previous day, and market participants may show a bearish reaction to his statements as he opens the door to expand monetary policy further. In light of the recent developments, is seems as though the FOMC will continue to keep the benchmark interest on hold throughout the second-half of the year, but the committee may look to carry its zero interest rate policy well into 2012 as the economic outlook remains clouded with high uncertainties. Nevertheless, as the U.S. stock market opens higher, it seems as though risk appetite is certainly back on the table, and the reserve currency may come under increased selling pressure should the rebound in trader sentiment gather pace.

The Euro struggled to hold its ground during the overnight trade and the single-currency may continue to give back the advances from earlier this week as fears surrounding the sovereign debt crisis reemerge. Indeed, the yield tied to Italy’s 5-Year bond auction hit a three-year high (4.93%) as the government is scheduled to vote on new austerity measures tomorrow, but the EU meeting in Rome will certainly come into focus over the next 24-hours of trading as European policy makers discuss the second bailout package for Greece. Should the group struggle to meet on common ground, the heightening risk for contagion will continue to sap demands for the single-currency, and the exchange rate may selloff going into the end of the week as the ongoing turmoil within the European financial systems bears down on the economic outlook. At the same time, the European Banking Authority is widely expected to publish the results of the stress test on Friday, and the outcome could show an increased number of bank failures on the horizon as the region faces a slowing recovery.

At the same time, the British Pound pared the advance to 1.6191 and the may continue to consolidate over the remainder of the week as investors speculate the Bank of England to strike a dovish tone in its policy meeting minutes, which are due out next week. In light of the recent developments coming out of the U.K., fears of a slowing recovery could spark a shift within the BoE, and the policy statement could highlight an increased willingness to expand the asset purchase program beyond GBP 200B as the committee aims to balance the risks for the region. As inflation cools, some members of the MPC may scale back their argument to lift the benchmark interest rate off the record-low, and we may a greater majority vote to maintain the current policy as the economic outlook remains clouded with high uncertainty. In turn, the rebound in the GBP/USD could be short-lived, and the exchange rate may make another run at the swing low from the end of January (1.5750) as interest rate expectations falter.

This article was republished with permission from The Street

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