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Euro Weighed By Spain, Sterling Outlook Hinges On Inflation Report

Euro Weighed By Spain, Sterling Outlook Hinges On Inflation Report

David Song, Strategist

Talking Points

  • Euro: Spain To Miss 2012 Deficit Target, Greece To Stay In Monetary Union
  • British Pound: BoE To Sound Increasingly Hawkish Despite Growth Concerns
  • U.S. Dollar: U. of Michigan On Tap, Sticky Core CPI To Spur Hawkish Remarks

Euro: Spain To Miss 2012 Deficit Target, Greece To Stay In Monetary Union

The Euro gave back the overnight advance to 1.2955 as the EU sees Spain missing its 2012 deficit target of 5.3%, and the heightening risk for contagion continues to cast a bearish outlook for the single currency as European policy makers maintain a reactionary approach in addressing the debt crisis. Meanwhile, the head of Greece’s New Democratic Party, Antonis Samaras, said the four parties agreed to stay in the union, but anti-austerity movement may continue to fuel speculation for a euro-area exit as the region struggles to draw up a coalition government.

As the EU struggles to meet on common ground, we are likely to see the governments operating under the single currency become increasingly reliant on monetary support, and the European Central Bank may face increased pressure to carry its easing cycle into the second-half of the year as the fundamental outlook for the region turns increasingly bleak. As the economic docket for the following week is expected to show the euro-area contracting 0.2% in the first-quarter, a dismal growth report is likely to fuel speculation for additional monetary support, and we should see the bearish formation in the EURUSD continue to take shape as the pair struggles to get back above former support around 1.3000. In turn, we should see the Euro continue to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, but we will keep a close eye on the relative strength index as it approaches oversold territory.

British Pound: BoE To Sound Increasingly Hawkish Despite Growth Concerns

The British Pound continued to give back the advance from the previous month, with the GBPUSD slipping to a fresh monthly low of 1.6061, but we may see the sterling regain its footing next week should the Bank of England strike a hawkish tone for monetary policy. Indeed, the quarterly inflation report highlights the biggest event risk for the sterling, and we may see the central bank lay out a tentative exit strategy as the stickiness in underlying price growth raises the risk for inflation. However, there’s speculation that the BoE will curb its growth forecast as the region slips back into recession, and we may see the central bank endorse its wait-and-see approach for the second-half of the year as the ongoing turmoil in the euro-area – the U.K.’s largest trading partner – continues to pose a risk for the region. As the short-term correction in the GBPUSD gathers pace, we may see the RSI struggle to maintain the upward trend from earlier this year, but we should see former support around 1.6000 act as new resistance as the pair continues to carve a series of higher highs paired with higher lows.

U.S. Dollar: U. of Michigan On Tap, Sticky Core CPI To Spur Hawkish Remarks

The greenback extended the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a fresh monthly high of 10,014, and the reserve currency looks poised to track higher in the coming days as it maintains the upward trend from the beginning of May. As market participants scale back their appetite for risk, a downturn in the U. of Michigan Confidence survey could fuel the flight to safety, and the greenback may track higher throughout the remainder of the day as it benefits from safe-haven flows. Although the economic docket for the following week is expected to show the headline reading for inflation falling back to 2.4% from 2.7% in April, the stickiness in the core CPI may encourage the Fed to adopt a hawkish tone for monetary policy, and we should see the dollar track higher throughout 2012 as the central bank moves away from its easing cycle.

--- 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 (MAY P)

76.0

76.4

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