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Euro Relief Rally Dampened By ECB, Sterling At Risk Amid More QE

Euro Relief Rally Dampened By ECB, Sterling At Risk Amid More QE

2012-06-29 13:40:00
David Song, Currency Strategist
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Talking Points

  • Euro: EU Strikes Deal On ESM, Spanish Bailout – ECB To Ease Policy Further
  • British Pound: Struggles To Clear 61.8% Fib, BoE To Conduct More QE
  • U.S. Dollar: Weighed By Risk-Appetite, NFP’s To Increase Another 90K

Euro: EU Strikes Deal On ESM, Spanish Bailout – ECB To Ease Policy Further

The Euro surged to a high of 1.2692 as the EU agreed to directly recapitalized commercial banks through the European Stability Mechanism, while the group said it would drop the senior loan status for Spain as the government looks to tap up to EUR 100B from the ESM. However, we saw German Chancellor Angela Merkel hold her ground as she continued to reject Euro bonds, and went onto say that easing borrowing condition for Spain’s is a special one-time case – curbing speculation that Italy may get a similar deal should it require assistance.

Indeed, the move has helped to alleviate the short-term strains in the European financial system, but it seems as though the group is making another attempt to buy more time as the deal does little to lift the fundamental outlook for the region. As a result, we may see the single currency come under pressure next week as market participants see the European Central Bank taking additional steps to shore up the ailing economy, and we may see the Governing Council carry out its easing cycle throughout the second-half of the year as growth and inflation tapers off. Although 45 of the 57 economists polled by Bloomberg News are calling for lower borrowing costs next week, market participants are pricing a 37% chance for a 25bp rate cut according to Credit Suisse overnight index swaps, and the shift in the policy outlook may dampen the appeal of the single currency as the central bank tries to stem the risk for a prolonged recession. As the EURUSD carves out a lower high around 1.2745, we should see the downward trending channel from 2011 continue to take shape, and we may see the pair give back the relief rally should the ECB continue to strike a dovish tone for monetary policy.

British Pound: Struggles To Clear 61.8% Fib, BoE To Conduct More QE

The British Pound advanced to an overnight high of 1.5697 amid the rise in risk-taking behavior, but the sterling may come under pressure next week as market participants see the Bank of England taking additional steps to shield the U.K. economy from the debt crisis. According to a survey by Bloomberg News, 38 of the 40 economists polled see the central bank expanding its asset purchase program beyond the GBP 325B target, but we may see the majority of the Monetary Policy Committee stick to its current policy in July as the stickiness in underlying price growth raises the threat for inflation. As the GBPUSD struggles to push back above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, we may see the exchange rate consolidate ahead of the rate decision, but the pair may fall back towards 50.0% Fib around 1.5270 should the BoE take a very aggressive approach in curbing the downside risks for the region.

U.S. Dollar: Weighed By Risk-Appetite, NFP’s To Increase Another 90K

The greenback gave back the advance from earlier this month, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 10,048, and the reserve currency may trade heavy throughout the North American trade as FX traders increase their appetite for risk. Nevertheless, as we’re expecting to see U.S. Non-Farm Payrolls increase another 90K in June, the tepid recovery in the labor market may renew speculation for another large-scale asset purchase program, but it seems as though the FOMC is moving away from quantitative easing as the committee extends ‘Operation Twist.’ In turn, we will maintain our medium-term call for the USD, and we should see the upward trend continue to take shape as the Fed softens 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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09:45

Chicago Purchasing Manager (JUN)

52.3

52.7

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13:55

09:55

U. of Michigan Confidence (JUN F)

74.1

74.1

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