Euro Rallies as Commercial Banks Prepare to Repay EUR 442B, British Pound Weighed By BoE Comments

Talking Points
•    Japanese Yen: Mostly Weaker Against the Majors
•    Pound: Household Confidence Slips to Six-Month Low
•    Euro: German Unemployment Falls Less-Than-Expected
•    U.S. Dollar: ADP Employment Report on Tap

The ECB said commercial banks asked for EUR 131.9B in thee-month loans as the EUR 442B 12-month tender is scheduled to expire tomorrow, and the data encourages an improved outlook for the European banking system as policy makers take unprecedented steps to stem the risks for a credit crisis.

Meanwhile, Governing Council board member Yves Mersch maintains a cautious outlook at a conference in Rome and said that monetary policy remains “appropriate” as the region faces an ”uneven” recovery, but went onto say that the economy “is coming out of the crisis” as policy makers the rebound in global activity gathers pace. At the same time, ECB member Lorenzo Bini Smaghi said that dumping the fixed-exchange rate system would be a “nightmare” and encouraged the countries operating under the single-currency “to stick by the rules,” and argued that region needs a “quantum leap” in integration during an interview with the British Broadcasting Corporation. Nevertheless, the economic docket showed unemployment in Germany slipped 21K in June amid forecasts for a 30K drop, while the jobless rate held steady at 7.7% after unexpectedly falling back from 7.8% in the previous month. Moreover, the CPI estimate for the Euro-Zone fell back to 1.4% during the same period from 1.6% in May, which exceeded expectations for a decline to 1.5%, and subdued price growth could lead the ECB to support the real economy throughout the second-half of the year as the governments within the region tighten fiscal policy.

The British Pound extended the decline from the previous day and slipped to a low of 1.4979 during the European trade as U.K. policy makers held a cautious outlook for the region, and the ongoing weakness within the real economy could lead the Bank of England to maintain a loose policy stance in the second-half of 2010 as the new governments looks to scale back on public spending and cut the budget deficit. BoE board member Adam Posen said that Britain is “tentatively” recovering, but is “still subject to switching back into the recession state” as the austerity measures weighs on the outlook for future growth, and he went onto say that “one-off shocks” are not the only cause behind the stickiness in prices while speaking at a conference in London. Meanwhile, consumer confidence in the U.K. slipped to a six-month low in June as the GfK survey weakened to -19 from -18 in the previous month, and households may turn increasingly pessimistic over the coming months as Prime Minister David Cameron plans to withdraw fiscal support from the economy. In addition, the Nationwide home price index tipped 0.1% higher in June versus projections for a 0.3% rise, while the annualized rate fell back to 8.7% from 9.8% in May.

U.S. dollar price action was mixed across the board, with the USD/JPY paring the previous day’s decline to reach a high of 88.75, and the greenback may continue to lack direction going into the North American session as the economic docket remains fairly light for Wednesday. However, the ADP employment report is expected to show a 60K rise in private payrolls following the 55K expansion in the previous month, and the data could bode well for Friday’s non-farm payrolls report as private employment is expected to increase 113K in June.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com