Euro: Germany Limits Participation Of ESFS, ECB Sees Slowing Inflation British Pound: To Consolidate Further, BoE To Face Increased Pressures U.S. Dollar: Benefits From Risk Aversion, Fed’s Beige Book On Tap The Euro struggled to hold its ground during the overnight trade and the single-currency may continue to pare the advance from earlier this week as the uncertainties surrounding the region weighs on market sentiment. Germany’s Finance Minister, Wolfgang Schaeuble, opposed giving the European Financial Stability Facility a ‘blank check’ to participant in the secondary market, and warned that bond purchases should ‘only take place under very tight conditions, when the ECB establishes that there are extraordinary circumstances.’ As there are still many unanswered questions in regards to the new bailout package for Greece, the EU should take advantage of the current situation to restore investor confidence, but the lack of urgency amongst the group may instill a bearish outlook for the euro as the heightening risk for contagion dampens the outlook for the region. At the same time, European Central Bank board member George Provopoulos said Greece should use this opportunity to ‘go beyond the targets of the program,’ but went onto say that inflation may fall below the 2% target towards the end of 2011 as second-round effects have failed to materialize. As the region faces a slowing recovery, we are likely to see the Governing Council continue to soften its hawkish outlook for monetary policy, and the relief rally in the EUR/USD may give out as interest rate expectations deteriorate. Should the shift away from risk-taking behavior gather pace during the North American trade, we should see the euro-dollar fall back below the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, and the exchange rate may consolidate further over the remainder of the week as market participants scale back their appetite for yields. The British Pound failed to maintain the overnight advance to 1.6436 and the sterling may continue to selloff during the North American trade as the recent batch of data from the U.K. shows a slowing recovery. As economic activity remains subdued, we are likely to see the Bank of England maintain its current policy stance throughout the remainder of the year, but the central bank may face increased pressures to expand its asset purchase program beyond the GBP 200B target as the government continues to carry out its tough austerity measures. As investors weigh the outlook for future policy, the GBP/USD looks as though it will trade within a broad range over the near-term, but demands for the sterling may dissipate in the days ahead should the flight to safety gather pace. The U.S. dollar showed a mixed reaction to the dismal Durable Goods Orders report, which showed a slowing recovery in the world’s largest economy, but the greenback appears to be regaining its footing as risk aversion flows back into the currency market. As equity futures foreshadow a lower open for the U.S. market, we may see the reserve currency benefit from safe-haven flows, but the uncertainties surrounding the debt ceiling will continue to dampen the appeal of the greenback as the U.S. inches closer to a default. Nevertheless, the Fed’s Beige Book due out later today could also bear down on market sentiment should the central bank continue to highlight the ongoing weakness within the real economy, and the survey may show an increased willingness to maintain the expansion in monetary policy as the FOMC aims to encourage a sustainable recovery. In turn, we may see a mixed reaction to the report, but the developments could fuel risk aversion as the fundamental outlook remains clouded with high uncertainties.

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