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Euro To Slide Further On Contagion Fear - Pound Eyes CPI, BoE Minutes

By , Currency Analyst
13 July 2012 12:50 GMT

Talking Points

  • Euro: Moody’s Cuts Italy’s Rating, Spanish Bank Borrowing Hits Record High
  • British Pound: Core Inflation To Tick Higher, BoE Minutes In Focus
  • U.S. Dollar: Producer Prices Top Forecast, Raising Outlook For Inflation

Euro: Moody’s Cuts Italy’s Rating, Spanish Bank Borrowing Hits Record High

The Euro weakened to an overnight low of 1.2180 as Moody’s Investor Services cut Italy’s credit rating to Baa2 from A3, and the bearish sentiment surrounding the single currency may gather pace over the near-term as the agency maintains a negative outlook for the region. At the same time, we saw commercial banks in Spain borrowed a record EUR 337B from the European Central Bank in May, and the ongoing turmoil in the financial system should encourage the Governing Council to ease monetary policy further as the EU struggles to restore investor confidence.

As the ECB turns increasingly cautious towards the economy, we should see the central bank continue to embark on its easing cycle in the second-half of the year, and the EURUSD remains poised for further declines as market participants raise bets for another rate cut in August. As the downward trend in the EURUSD continues to gather pace, we will maintain a bearish outlook going into the following week, but we will need to keep a close eye on the relative strength index as it approaches oversold territory. Should the oscillator slip below 30, the break in the RSI is likely to produce fresh 2012 lows in the exchange rate, and we will look for a short-term correction once the indicator bounces back from the extremes.

British Pound: Core Inflation To Tick Higher, BoE Minutes In Focus

The British Pound bounced back on Friday as the Bank of England announced its new lending program may boost private sector by at least GBP 80B, and the GBPUSD may continue to face range-bounce prices ahead of the BoE Minutes as market participants weigh the outlook for monetary policy. As the central bank steps up its effort to stimulate the ailing economy, the GBP 50B expansion in the Asset Purchase Facility should foster a more robust recovery, but the Monetary Policy Committee may be nearing the end of its easing cycle amid the stickiness in underlying price growth. Indeed, the economic docket for the following week is expected to the core consumer price index advancing for the second consecutive month in June, and we may see the BoE scale back its dovish tone for monetary policy as inflation continues to hold above the 2% target. In turn, we may see the GBPUSD continue to hold above the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270, and we may see the pair make another run at the 100-Day SMA (1.5797) as market participants scale back bets for more quantitative easing.

U.S. Dollar: Producer Prices Top Forecast, Raising Outlook For Inflation

The struggled to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the advance to 10,213, but the reserve currency may regain its footing during the North American trade as the developments coming out of the world’s largest economy dampens the scope for additional monetary support. Indeed, the uptick in the Producer Price Index limits the Fed’s scope to push through another large-scale asset purchase program, and we should see the central bank continue to move away from its easing cycle as the recovery gets on a more sustainable path. In turn, we may see the Consumer Price report on tap for the following week top market expectations, and the growing threat for inflation should prop up the USDOLLAR as it curbs bets for QE3.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:55

9:55

U. of Michigan Confidence (JUL P)

73.5

73.2

USD

17:20

13:20

Fed's Dennis Lockhart Speaks on U.S. Economy

Currency

GMT

Release

Expected

Actual

Comments

CNY

2:00

Real GDP (QoQ) (2Q)

1.6%

1.8%

Slowest pace of growth since 1Q 2009.

CNY

2:00

Real GDP (YoY) (2Q)

7.7%

7.6%

CNY

2:00

Real GDP (YTD) (YoY) (2Q)

7.9%

7.8%

CNY

2:00

Industrial Production (YoY) (JUN)

9.8%

9.5%

Lowest since April.

CNY

2:00

Industrial Production (YTD) (YoY) (JUN)

10.5%

10.5%

CNY

2:00

Retail Sales (YoY) (JUN)

13.5%

13.7%

Slowest pace of growth since February 2011.

CNY

2:00

Retail Sales (YTD) (YoY) (JUN)

14.3%

14.4%

CNY

2:00

Fixed Assets Investment ex Rural (YTD) (YoY) (JUN)

20.0%

20.4%

Highest since March.

JPY

4:30

Industrial Production (MoM) (MAY F)

--

-3.4%

Largest contraction since March 2011.

JPY

4:30

Industrial Production (YoY) (MAY F)

--

6.0%

JPY

4:30

Capacity Utilization (MoM) (MAY F)

--

-2.2%

CHF

7:15

Producer & Import Prices (MoM) (JUN)

-0.4%

-0.3%

Contracts for 14 straight months.

CHF

7:15

Producer & Import Prices (YoY) (JUN)

-2.2%

-2.2%

EUR

8:00

Italian Consumer Price Index (NIC incl. tobacco) (MoM) (JUN F)

0.2%

0.2%

Fastest pace of growth this year.

EUR

8:00

Italian Consumer Price Index (NIC incl. tobacco) (YoY) (JUN F)

3.3%

3.3%

EUR

8:00

Italian Consumer Price Index - EU Harmonized (MoM) (JUN F)

0.2%

0.2%

EUR

8:00

Italian Consumer Price Index - EU Harmonized (YoY) (JUN F)

3.6%

3.6%

USD

12:30

Producer Price Index (MoM) (JUN)

-0.4%

0.1%

First monthly advance since February. Headline reading holds steady for second month.

USD

12:30

Producer Price Index (YoY) (JUN)

0.2%

0.7%

USD

12:30

Producer Price Index Ex Food & Energy (MoM) (JUN)

0.2%

0.2%

USD

12:30

Producer Price Index Ex Food & Energy (YoY) (JUN)

2.6%

2.6%

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13 July 2012 12:50 GMT