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Euro Weighed By Bets For More ECB Easing, Sterling To Threaten Range

Euro Weighed By Bets For More ECB Easing, Sterling To Threaten Range

2012-07-02 12:30:00
David Song, Strategist
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Talking Points

  • Euro: Unemployment Hits Record High, Mixed Bets On ECB
  • British Pound: Sideways Price Action Ahead, More QE To Threaten Range
  • U.S. Dollar: Benefits From Risk Aversion, ISM Manufacturing To Slow In June

Euro: Unemployment Hits Record High, Mixed Bets On ECB

The Euro slipped to a low of 1.2585 as the jobless rate climbed to 11.1% from 11.0% in April, and the single currency may continue to give back the rebound from June as the European Central Bank is widely expected to ease monetary policy further in July. According to a Bloomberg News survey, 49 of the 60 economists polled see a 25bp rate cut this week, while investors are now pricing a 35% chance for lower borrowing costs, but we may see the Governing Council implement a range of tools to shore up the ailing economy as the region continues to face a risk for a prolonged recession.

Indeed, market participants see scope for additional bond purchases paired with another Long Term Refinancing Operation amid the ongoing turmoil in the financial system, and the central bank may have little choice but to carry out its easing cycle throughout the second-half of the year as the outlook for growth and inflation deteriorates. As the EURUSD remains capped by 1.2750, we may have an opportunity to take advantage of the range-bound price action in the exchange rate, and we may see the euro-dollar work its way back towards the 1.2400 figure as currency traders weigh the outlook for monetary policy. Although we continue to favor a bearish outlook for the EURUSD, the fresh batch of central bank rhetoric is likely to set the tone for July, and we will need to see the central bank continue to strike a dovish tone for monetary policy for the downward trend in the exchange rate to gather pace over the near-term.

British Pound: Sideways Price Action Ahead, More QE To Threaten Range

The British Pound tracked lower during the overnight trade as market participants scaled back their appetite for risk, and the sterling may threaten the sideways price action carried over from June as market participants see the Bank of England expanding its asset purchase program beyond the GBP 325B target. Indeed, 39 of the 41 economists polled by Bloomberg see the Monetary Policy Committee implementing more quantitative easing this month, but we may see the majority continue to endorse a wait-and-see approach as the stickiness in underlying price growth raises the threat for inflation. As the GBPUSD struggles to hold above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, the near-term outlook remains tilted to the downside, and we may see the pair make another run at the 50.0% Fib around the 1.5270 figure should the BoE strike a dovish outlook for monetary policy.

U.S. Dollar: Benefits From Risk Aversion, ISM Manufacturing To Slow In June

The greenback bounced back on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,087, and the reserve currency may appreciate further over next 24-hours of trading should the rise in risk aversion gather pace during the North American trade. However, as manufacturing in the world’s largest economy is expected to expand at a slower pace in June, a dismal development may drag on market sentiment, and a larger-than-expected decline in the ISM index may fuel speculation for more Fed support as the central bank maintains a cautious tone for the region. However, we are still fairly bullish on the dollar as the FOMC expands ‘Operation Twist’ over expanding its balance sheet further, and it seems as though the committee will move away from quantitative easing amid the stickiness in underlying inflation.

--- 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

USD

14:00

10:00

ISM Manufacturing (JUN)

52.0

53.5

USD

14:00

10:00

ISM Prices Paid (JUN)

46.0

47.5

USD

14:00

10:00

Construction Spending (MoM) (MAY)

0.2%

0.3%

EUR

16:00

12:00

Italian New Car Registrations (YoY) (JUN)

-14.26%

EUR

17:00

13:00

Italian Budget Balance (euros) (JUN)

-4.3B

EUR

17:00

13:00

Italian Budget Balance (euros) (YTD) (JUN)

-35.1B

USD

17:15

13:15

Fed's John Williams Speaks on Monetary Policy

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

Hometrack Housing Survey (MoM) (JUN)

--

0.0%

Holds flat for the third time this year.

GBP

23:01

Hometrack Housing Survey (YoY) (JUN)

--

-0.5%

AUD

23:30

AiG Performance of Manufacturing Index (JUN)

--

47.2

Contracts for the fourth month.

JPY

23:50

Tankan Large Manufacturers Index (2Q)

-4

-1

Marks the biggest advance since 4Q 2007.

JPY

23:50

Tankan Non-Manufacturing Index (2Q)

7

8

JPY

23:50

Tankan Large Manufacturers Outlook (2Q)

-4

1

JPY

23:50

Tankan Non-Manufacturing Outlook (2Q)

6

6

JPY

23:50

Tankan Large All Industry Capex (2Q)

3.6%

6.2%

AUD

0:30

TD Securities Inflation (MoM) (JUN)

--

-0.2%

Slowest pace of growth since October 2009.

AUD

0:30

TD Securities Inflation (YoY) (JUN)

--

1.6%

CNY

2:30

HSBC Purchasing Manager Index Manufacturing (JUN)

--

48.2

Slips to a seven-month low.

JPY

5:00

Vehicle Sales (YoY) (JUN)

--

40.9%

Slowest pace of growth since February.

AUD

6:30

RBA Commodity Price Index (JUN)

--

97.5

Biggest decline since December 2009.

AUD

6:30

RBA Commodity Index SDR (YoY) (JUN)

--

-10.5%

CHF

7:15

Retail Sales (Real) (YoY) (MAY)

--

6.2%

Largest rise since September 2008.

CHF

7:30

SVME-Purchasing Managers Index (JUN)

45.0

48.1

Contracts for eleven consecutive months.

EUR

7:45

Italian Purchasing Manager Index Manufacturing (JUN)

44.6

44.6

EUR

7:50

French Purchasing Manager Index Manufacturing (JUN F)

45.3

45.2

EUR

7:55

German Purchasing Manager Index Manufacturing (JUN F)

44.7

45.0

EUR

8:00

Euro-Zone Purchasing Manager Index Manufacturing (JUN F)

44.8

45.1

EUR

8:00

Italian Unemployment Rate s.a. (MAY P)

10.3%

10.1%

Lowest since March.

GBP

8:30

Purchasing Manager Index Manufacturing (JUN)

46.5

48.6

Contracts for second month.

EUR

9:00

Euro-Zone Unemployment Rate (MAY)

11.1%

11.1%

Highest since the series began in 1995.

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