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Euro Outlook Remains Bearish On Further ECB Support, Pending Bailouts

Euro Outlook Remains Bearish On Further ECB Support, Pending Bailouts

2012-06-13 14:10:00
David Song, Strategist
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Talking Points

  • Euro: Spain Calls On ECB To Purchase Debt, Greece To Seek Third Bailout
  • British Pound: Fails To Test 1.5600, All Eyes On BoE Governor King
  • U.S. Dollar: Retail Sales, Produce Prices Disappoint – Fueling Speculation For QE3

Euro: Spain Calls On ECB To Purchase Debt, Greece To Seek Third Bailout

The Euro extended the advance from the previous day as Spanish Prime Minister Mariano Rajoy put increase pressure on the European Central Bank to address the heightening risk for contagion, and we may see the Governing Council continue to carry out its easing cycle in the second-half of the year as the fundamental outlook for the region turns increasingly bleak. Indeed, a Germany newspaper said Greece may need a third bailout as it struggles to get its house in order, while there’s growing speculation Cyprus will be next in-line to request aid amid the ongoing turmoil in the banking sector.

As the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support, the ECB may have little choice but to expand monetary policy further in July, but we may see the Governing Council implement a range of tools to address the risks surrounding the region as the EU maintains a reactionary approach in tackling the debt crisis. The negative headlines coming out of the region continues to cast a bearish outlook for the EURUSD, but it seems as though the pair will continue to face range-bound prices ahead of the Greek elections as the threat of a euro-area breakup remains on the table. As the EURUSD remains capped by the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may have an opportunity to play the sideways price action going into the end of the week, and we may see the pair consolidate over the next 24-hours as it struggles to put in a close above the 20-Day SMA (1.2545). In turn, negative headlines coming out of Europe may pave the way for a move back towards the 1.2300 figure, and we will maintain a bearish outlook for the euro-dollar as it appears to be carving out a lower top on June.

British Pound: Fails To Test 1.5600, All Eyes On BoE Governor King

The British Pound marked a failed run at former support (1.5600) amid the shift away from risk-taking behavior, and the GBPUSD may continue to consolidate over the remainder of the week as it maintains the range-bounce price action from earlier this month. As the pound-dollar appears to be carving out a lower top in June, we should see the exchange rate fall back towards the 50.0% Fib from the 2009 low to high around 1.5270, but the sterling may face additional headwinds in the week ahead as Bank of England officials turn increasingly cautious towards the economy. Indeed, the BoE Minutes on tap for June 20 highlights the biggest event risk for the near-term, but comments from Governor Mervyn King – who’s scheduled to speak tomorrow at 18:00 GMT – may instill a bearish outlook for the sterling should the central bank head lean towards more easing.

U.S. Dollar: Retail Sales, Produce Prices Disappoint – Fueling Speculation For QE3

The greenback remains under pressure on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,161, and the reserve currency may continue to give back the rebound from earlier this week as European policy makers increase their effort to prop up market sentiment. At the same time, easing price pressure paired with the drop in private sector consumption has renewed speculation for another round of quantitative easing as the Federal Reserve keeps the door open to expand monetary policy further, but we expect the FOMC to preserve its wait-and-see approach throughout 2012 as the world’s largest economy gets on a more sustainable path. In turn, we remain bullish over the medium-term, and we should see the dollar resume the advance from earlier this year as the central bank continues to soften its dovish tone for monetary policy.

--- 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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