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Euro Hit By Speculation For Spanish Bailout, Range-Bound Prices Ahead

Euro Hit By Speculation For Spanish Bailout, Range-Bound Prices Ahead

David Song, Strategist

Talking Points

  • Euro: Spain To Tap Bailout Fund, Range-Bound Prices Ahead
  • British Pound: Inflation Expectations Tick Higher, 50.0% Fib To Provide Support
  • U.S. Dollar: Correction To Be Muted By Less-Dovish Fed

Euro: Spain To Tap Bailout Fund, Range-Bound Prices Ahead

The Euro continued to give back the advance from earlier this week, with the EURUSD slipping to an overnight low of 1.2446, and the single currency may face additional headwinds over the following week as European policy makers encourage Spain to tap the bailout fund. European Central Bank board member Ewald Nowotny said it is ‘sensible’ for Spain to seek aid as the region ‘currently has a problem with its banks and of course a real estate bubble,’ and went onto say the Governing Council ‘may have to react’ amid the growing risk for prolonged recession.

In turn, there are expectations that the EU will hold talks over the weekend to discuss a potential bailout for Spain, but the measure will only help to buy more time as it fails to lift the fundamental outlook for the region. As a result, we should see the ECB continue to carry out its easing cycle in the second-half of the year, and the Governing Council may ultimately utilize a range of policy tools in the coming months amid the heightening threat for contagion. As the EURUSD fails to push back above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may see the pair track sideways in the week ahead, and the euro-dollar may struggle to mark a more meaningful correction as the debt crisis continues to drag on investor confidence.

British Pound: Inflation Expectations Tick Higher, 50.0% Fib To Provide Support

The British Pound slipped to 1.5404 as market participants scaled back their appetite for risk, but it seems as though the GBPUSD will track sideways ahead of the Bank of England Minutes due out on June 20 as market participants weigh the outlook for monetary policy. Nevertheless, a survey by the BoE showed consumer inflation expectations for the next 12-months advanced to 3.7% from 3.5% in February, and we may see the Monetary Policy Committee continue to move away from its easing cycle as the stickiness in underlying price growth raises the risk for inflation. As the GBPUSD struggles to push back above former support around 1.5600, the exchange rate may work its way back towards the 50.0% Fib from the 2009 low to high around 1.5270, but the sterling may outperform its major counters in the second-half of the year as central bank officials soften their dovish tone for monetary policy.

U.S. Dollar: Correction To Be Muted By Less-Dovish Fed

The greenback regained its footing on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,242, and the reserve currency may appreciate further during the North American trade as the flight to safety gathers pace. In light of the recent comments by Fed Chairman Ben Bernanke, it seems as though the FOMC will preserve its wait-and-see approach in 2012, and we should see the central bank continue to soft its dovish tone for monetary policy as the world’s largest economy gets on a more sustainable path. In turn, it seems as though we’re seeing a fairly muted correction in the USD, and the greenback may continue to gain ground against its major counterparts as the heightening threat for contagion saps investor confidence.

--- 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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