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Euro Struggles Ahead Of EU Summit, Sterling Looks Toward BoE Minutes

Euro Struggles Ahead Of EU Summit, Sterling Looks Toward BoE Minutes

2012-05-22 13:45:00
David Song, Strategist
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Talking Points

  • Euro: OECD Cuts Growth Forecast, EU Summit In Focus
  • British Pound: IMF Calls For More QE On Slower Growth, Easing Inflation
  • U.S. Dollar: Benefits From Risk Aversion, Fed’s Lockhart Promotes Wait-And-See Approach

Euro: OECD Cuts Growth Forecast, EU Summit In Focus

The Euro slipped to an overnight low of 1.2736 as the Organization for Economic Cooperation and Development lowered its 2012 and 2013 growth forecast for the euro-area, and the single currency may face additional headwinds over the next 24-hours of trading as the EU maintains a reactionary approach in addressing the risks surrounding the region. As the governments operating under the fixed exchange rate system struggle to contain the debt crisis, the OECD called for ‘further action by the ECB through its government bond purchasing program,’ but we may see the central bank move away from its non-standard measures as they have a limited impact on the real economy.

As the EU Summit in Brussels comes into focus, there’s limited scope of seeing a major development this week as policy makers across Europe continue to act in their own interest, and we may see a growing rift between France and Germany as the anti-austerity movement gathers pace. In turn, the ECB may have little choice but to carry its easing cycle into the second-half of the year, and we may see the Governing Council target the benchmark interest rate in an effort to stem the risk for a prolonged recession. As the EURUSD struggles to make a meaningful push back above the 10-Day SMA (1.2808), we should see the pair consolidate going into the middle of the week, and we will look for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the region turns increasingly bleak.

British Pound: IMF Calls For More QE On Slower Growth, Easing Inflation

The British Pound weakened to 1.5763 as the headline reading for U.K. inflation missed market expectations, while the International Monetary Fund called for additional monetary support ‘if downside risks materialize and the recovery fails to take off.’ However, the Bank of England Minutes due out later this week may continue to show a 8-1 split amid the stickiness in underlying price growth, and the central bank may have a hard time pushing through more quantitative easing as its credibility to ensure price stability comes under scrutiny. As the relative strength index on the GBPUSD continues to hold above oversold territory, the pound-dollar appears to be carving out a short-term base going into the end of May, and we will need a less dovish statement from the BoE to see a meaningful correction in the days ahead.

U.S. Dollar: Benefits From Risk Aversion, Fed’s Lockhart Promotes Wait-And-See Approach

The greenback bounced back on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a high of 10,134, and the reserve currency may appreciate further over the next 24-hours of trading as the flight to safety gathers pace. However, as European policy makers talk down speculation for a Greek exit, hopes surrounding the EU Summit may help to prop up market sentiment, and we may see the greenback consolidate going into the middle of the week as risk trends continue to dictate price action across the foreign exchange market. Meanwhile, Atlanta Fed President Dennis Lockhart, who also serves on the FOMC this year, warned that the fundamental outlook for the world’s largest economy is ‘titled modestly to the downside’ amid the spillover effects from the debt crisis, and went onto say that additional monetary support may become necessary if ‘there is a severe deterioration in the U.S.’ In light of the recent remarks, it seems as though the Fed will preserve its wait-and-see approach for most of 2012, and we may see the central bank continue to move away from its easing cycle amid the stickiness in core inflation.

--- 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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EUR

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14:00

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-20.5

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11

14

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Existing Home Sales (APR)

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