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Talking Points

  • Euro: ECB Hints At More Easing Despite Growing Rift, 23.6% Fib In Sight
  • British Pound: RSI Comes Off Of Oversold, Needs To Clear 10-Day SMA

Euro: ECB Hints At More Easing Despite Growing Rift, 23.6% Fib In Sight

The Euro snapped back from a low of 1.2439 as the European Central Bank showed a greater willingness to address the ongoing turmoil in the banking sector, and it seems as though the Governing Council will continue to carry out its easing cycle in the second-half of the year as the fundamental outlook for the region turns increasingly bleak. Although some members of the ECB called for a 25bp rate cut in June, it seems as though President Mario Draghi is keeping the door open to expand the balance sheet further, and we may see the central bank further utilize a range of tools to stem the risks surrounding the region as the EU maintains a reactionary approach in tackling the debt crisis.

Indeed, there appears to be a growing rift within the Governing Council as the outlook for region remains clouded with high uncertainty, but we may see the central bank act in July as the region faces an increased risk for a prolonged recession. However, as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support, it seems as though the central bank is sticking to its wait-and-see approach in an effort to preserve its independence, and the council may continue to sit on the sidelines until the EU takes a more proactive approach in restoring investor confidence. Nevertheless, the short-term rebound in the EURUSD may ultimately turn into a larger correction as the relative strength index continues to come off of oversold territory, and we may see the pair test the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 for interim resistance, and we may see the exchange rate face sideways price action over the near-term as market participants look forward to the elections in France and Greece as well as the EU Summit scheduled for later this month. Over the next 24-hours of trading, we will be closely watching the medium and long-term bond auction in Spain, and the relief rally in the EURUSD may taper off should the debt sale fuel fears for contagion.

British Pound: RSI Comes Off Of Oversold, Needs To Clear 10-Day SMA

The British Pound snapped back on Wednesday amid the rise in risk-taking behavior, and the GBPUSD may continue to track higher ahead of the Bank of England interest rate decision as the relative strength index bounces back from oversold territory. In turn, we are looking for a break and a close above the 10-Day SMA (1.5512) to see a meaningful correction in the exchange, but the BoE meeting may do little to prop up the sterling as the central bank is widely expected to preserve its wait-and-see approach in June. As a result, we may see the Monetary Policy Committee refrain from releasing a policy statement, and currency traders will certainly turn their attention to the meeting minutes due out on the 20th as market participants see scope for more quantitative easing.

--- Written by David Song, Currency Analyst

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