Talking Points

• Euro: Global Central Banks Coordinate SWAP Deal, Rate Cut Expectations Accelerate
• British Pound: U.K. To Implement GBP 40B Credit-Easing Program

Euro:Global Central Banks Coordinate SWAP Deal, Rate Cut Expectations Accelerate

The Euro spiked to a high of 1.3532 as the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Japan, and the Bank of Canada agreed to lower SWAP rates by 50bp, but we may see the single currency struggle to hold its ground going into December as optimism surrounding the EU meeting tapers off. Although the euro-area finance ministers agreed to release the EUR 8B bailout payment for Greece, the lack of details in leveraging the European Financial Stability Facility has damped hopes of seeing a major push to strengthen the financial system, and the euro remains poised to face additional headwinds over the near-term as the EU fails to meet on common ground.

As European policy makers struggle to contain the debt crisis, market participants see the ECB easing policy further next month, but the central bank may have little choice but to carry its easing cycle into the following year as the governments operating under the monetary union become increasingly reliant on monetary stimulus. According to Credit Suisse overnight index swaps, investors are now pricing a 91% chance for a 25bp rate cut at the next meeting on December 8, and we may see the Governing Council move away from its nonstandard measures as its asset purchase program comes under increased scrutiny. However, there’s speculation that the ECB will also expand its temporary tools next month in order to combat record-high financing costs, and expectations for additional monetary stimulus is likely to dampen the appeal of the Euro as the fundamental outlook for the region turns increasingly bleak. As the EUR/USD struggles to hold above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we should see the exchange rate consolidate throughout the North American trade, but the near-term outlook for the single-currency remains bearish as the region has yet to get its house in order.

British Pound: U.K. To Implement GBP 40B Credit-Easing Program

The British Pound advanced to a fresh weekly high of 1.5757 following the rise in risk sentiment, but the recent strength in the sterling may taper off as U.K. policy makers turn increasingly cautious towards the economy. Chancellor of the Exchequer George Osborne said the slowdown in the euro-area raises the risk of a double-dip recession for Britain, but went onto say that the austerity plan puts the U.K. ‘ahead of the curve’ during an interview with the BBC Radio. Indeed, we may see the Pound outperform in the long run as the government sticks with its budget-cutting measures, but the lack of fiscal support will put additional pressures on the Bank of England shore up the ailing economy. There’s speculation being floated around that the BoE will look to expand its asset purchase program by another GBP 100-150B over the coming months, and bets for more quantitative easing highlights a bearish outlook for the near-term as the central bank sees an increased risk of undershooting the 2% target for inflation. In turn, the recent rally in the GBP/USD may taper off going into December, and we may see the pair consolidate in the coming days as the outlook for the U.K. remains clouded with high uncertainty.

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--- Written byDavid Song, Currency Analyst

To contactDavid, e-maildsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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