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Euro Searches For Support, EU Summit To Provide Little Relief

Euro Searches For Support, EU Summit To Provide Little Relief

2012-05-23 14:15:00
David Song, Strategist
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Talking Points

  • Euro: EU Summit To Generate Little Support, ECB To Come Under Pressure
  • British Pound: BoE Votes 8-1, Keeps Door Open To Ease Further
  • U.S. Dollar: Index Hits Fresh 2012 High As Flight To Safety Gathers Pace

Euro: EU Summit To Generate Little Support, ECB To Come Under Pressure

The Euro bounced back from a fresh yearly low of 1.2563 amid the renewed effort to address the sovereign debt crisis, but the threat of a Greek exit may continue to drag on the single currency as European policy makers continue to move in their own interest. As the EU Summit in Brussels takes center stage, headlines coming out of Europe will continue to heavily influence the EURUSD over the remainder of the week, and the meeting may reveal a growing rift within the group as the anti-austerity movement gathers pace. As French President Francois Hollande pushes for a euro-area bond, German Deputy Finance Minister Thomas Steffen quickly shot down the idea, and the conference may do little to restore investor confidence as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

However, it seems as though the European Central Bank will carry its wait-and-see approach into the second-half of the year in an effort to secure its independence, and it seems as though the Governing Council is moving away from its non-standard measures as they have a limited impact on the real economy. At the same time, the Bundesbank argued that a Greek exit ‘would be significant but manageable within the help of cautious crisis management’ as region struggles to form a coalition government, but the threat of contagion may ultimately trigger a major selloff in the Euro as it sets precedence for the European periphery. As the EURUSD trades back above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, the pair may be carving out a short-term floor above the 1.2600 figure, but we will be keeping a close eye on the relative strength index as it continues to sit in oversold territory.

British Pound: BoE Votes 8-1, Keeps Door Open To Ease Further

The British Pound quickly pared the overnight decline to 1.5670 as the Bank of England Minutes revealed another 8-1 split within the Monetary Policy Committee, but the sterling may face additional headwinds in the coming days as the central bank keeps the door open to expand monetary policy further. Although the BoE saw a risk of undershooting the 2% target for inflation, the MPC said that the longer-term outlook for price growth limits the scope for more quantitative easing, and sees the recovery strengthening later down the line as the euro-area continues to pose a ‘significant threat’ to the U.K. In turn, we should see the BoE stick to its neutral policy stance for most of 2012, but the central bank may continue to move away from its easing cycle amid the stickiness in underling price growth. As the GBPUSD reverts back to the range-bounce price action from earlier this year, we may see the pair come against the 1.5600 to test for support, and we will continue to watch the relative strength index as it slips into oversold territory.

U.S. Dollar: Index Hits Fresh 2012 High As Flight To Safety Gathers Pace

The greenback continued to appreciate against its major counterparts, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh yearly high of 10,201, and the reserve currency may gain ground over the remainder of the week as the flight to safety gathers pace. In light of the headline-driven market, dismal developments coming out of the euro-area should continue to sap risk-taking behavior, and we may see the greenback continue to defy market expectations as it benefits from safe-haven flows. However, as the RSI on the USDOLLAR pushes back into overbought territory, we will need a move back below 70 for a short-term correction to take shape, and we will stick with our bullish outlook for the greenback as the fundamental outlook for the world’s largest economy improves.

--- 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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