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Euro Looks Lower Despite Oversold Signal, Pound Searches For Support

Euro Looks Lower Despite Oversold Signal, Pound Searches For Support

David Song, Strategist

Talking Points

  • Euro: EU Looks To ESM To Recapitalize Banks, ECB May Sound Increasingly Dovish
  • British Pound: Struggles To Find Support, BoE Warns Of Euro Breakup
  • U.S. Dollar: Pending Home Sales Disappoints, Fed Rhetoric On Tap

Euro: EU Looks To ESM To Recapitalize Banks, ECB May Sound Increasingly Dovish

The Euro pared the overnight decline to 1.2423 as the EU floated the idea of recapitalizing the banking sector through the European Stability Mechanism, but the single currency is certainly struggling to hold its ground as heightening finance costs across the periphery countries continue to raise the risk for contagion. At the same time, European Union Economic and Monetary Affairs Commissioner Olli Rehn said the group may ‘consider’ extending the deadline for Spain to meet its deficit target as the anti-austerity movement gathers pace, but it seems as though European policy maker are making another attempt to buy more time as the governments operating under the single currency become increasingly reliant on monetary support.

As European Central Bank President Mario Draghi is scheduled to speak later today, the central bank head may sound increasingly dovish amid the slew of negative developments coming out of the region, and Mr. Draghi may talk up speculation for additional monetary support as the region continues to face a risk for a prolonged recession. As the ECB is widely expected to carry its easing cycle into the second-half of the year, the downward trend in the EURUSD should continue to take shape, and we will be keeping a close eye on the relative strength index as market participants look for a short-term correction. As the RSI continues to sit in oversold territory, we need to see a move back above 30 to see a meaningful rebound in the exchange rate, but we may see a fairly muted correction in the EURUSD as it remains capped by the 10-Day SMA at 1.2606.

British Pound: Struggles To Find Support, BoE Warns Of Euro Breakup

The British Pound is struggling to hold its ground on Wednesday despite the slew of positive developments coming out of the U.K., and the GBPUSD may continue to give back the advance from earlier this year as it fails to find support around the 1.5600 figure. As the economic recovery gradually gathers pace, we should see the Bank of England continue to soften its dovish tone for monetary policy, but the threat of a euro-area breakup may encourage the central bank to preserve its current stance as it raises the risk for a larger economic contraction in Britain. BoE Markets Director Paul Fisher said firms in the U.K, should not rule out a euro breakup amid the growing rift within the EU, and we may see the Monetary Policy Committee keep the door open to expand its balance sheet further as it aims to encourage a sustainable recovery. Similar to the EURUSD, the RSI on the GBPUSD continues to push into oversold territory, and the headline-driven market may continue to push the sterling lower over the remainder of the week as market participants scale back their appetite for risk.

U.S. Dollar: Pending Home Sales Disappoints, Fed Rhetoric On Tap

The greenback continued to track higher on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh yearly high of 10,235, and the reserve currency may gain ground throughout the North American trade as the flight to safety gathers pace. However, as the dismal U.S. Pending Home Sales dampens the outlook for the world’s largest economy, Fed officials may continue to highlight the ongoing slack in the housing market, but we should see the FOMC move away from its easing cycle as the recovery gets on a more sustainable path. In turn, we remain bullish against the USD, but the dollar looks poised for a short-term correction as the rally from the beginning of the month remains overbought.

--- 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.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

15:30

11:30

ECB President Mario Draghi Speaks on Euro Economy

EUR

16:00

12:00

French Total Jobseekers Change (APR)

20.0

16.6

EUR

16:00

12:00

French Total Jobseekers (APR)

2904.0k

2884.5k

USD

17:20

13:20

Fed's Richard Fisher Speaks on U.S. Economy

USD

17:30

13:30

Fed's William Dudley Speaks on U.S. Economy

USD

20:30

16:30

Fed's Eric Rosengren Speaks on U.S. Economy

GBP

23:01

19:01

GfK Consumer Confidence Survey (MAY)

-32

-31

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:15

Nomura/JMMA Manufacturing Purchasing Manager Index (MAY)

--

50.7

Holds steady for second month.

AUD

1:30

Construction Work Done (1Q)

3.0%

5.5%

Fastest pace of growth since 3Q 2011.

AUD

1:30

Retail Sales s.a. (MoM) (APR)

0.2%

-0.2%

Contracts for the first time since June 2011.

CHF

7:00

KOF Swiss Leading Indicator (MAY)

0.40

0.81

Highest since September.

EUR

8:00

Euro-Zone M3 s.a. (3M) (APR)

3.1%

2.7%

Slowest pace of growth since January.

EUR

8:00

Euro-Zone M3 s.a. (YoY) (APR)

3.4%

2.5%

EUR

8:00

Italian Producer Price Index (MoM) (APR)

0.3%

0.3%

Lowest reading since March 2010.

EUR

8:00

Italian Producer Price Index (YoY) (APR)

2.3%

2.5%

GBP

8:30

Mortgage Approvals (APR)

50.1K

51.8K

Highest since January.

GBP

8:30

Net Consumer Credit (APR)

0.2B

0.3%

GBP

8:30

Net Lending Sec. on Dwellings (APR)

1.0B

1.1B

GBP

8:30

M4 Money Supply (MoM) (APR)

--

1.1%

Smallest yearly contraction since January.

GBP

8:30

M4 Money Supply (YoY) (APR)

--

-3.8%

GBP

8:30

M4 Money Supply ex IOFCs (Annualized) (3M) (APR)

--

3.8%

EUR

9:00

Euro-Zone Economic Confidence (MAY)

91.9

90.6

Marks the lowest reading since October 2009.

EUR

9:00

Euro-Zone Business Climate Indicator (MAY)

-0.67

-0.77

EUR

9:00

Euro-Zone Consumer Confidence (MAY F)

-19.3

-19..3

EUR

9:00

Euro-Zone Industrial Confidence (MAY)

-10.2

-11.3

EUR

9:00

Euro-Zone Services Confidence (MAY)

-2.8

-4.9

USD

11:00

MBA Mortgage Applications (MAY 25)

--

-1.3%

Weakens for the first time in May.

CAD

12:30

Industrial Product Price (MoM) (APR)

0.1%

0.0%

Fails to grow for the first time since December.

CAD

12:30

Raw Materials Price Index (MoM) (APR)

-2.0%

-2.0%

USD

14:00

Pending Home Sales (MoM) (APR)

0.0%

-5.5%

Contracts for the first time since December.

USD

14:00

Pending Home Sales (YoY) (APR)

22.0%

14.7%

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES