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Euro Optimism Fizzles Ahead Of ECB, Sterling Outlook Hinges On BoE

Euro Optimism Fizzles Ahead Of ECB, Sterling Outlook Hinges On BoE

2012-07-03 12:45:00
David Song, Strategist
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Talking Points

  • Euro: ECB Looks As Deposit Guarantees, Greek To Renegotiate Bailout Terms
  • British Pound: Struggles To Hold Above 61.8% Fib Ahead Of BoE Rate Decision
  • U.S. Dollar: Tracks Higher Ahead Of Holiday Trade, Choppy Prices Ahead

Euro: ECB Looks As Deposit Guarantees, Greek To Renegotiate Bailout Terms

The Euro climbed to an overnight high of 1.2613 as European Central Bank board member Christian Noyer floated the idea of adopting a bank deposit guarantee program with ‘massive firepower,’ while there’s speculation that Greece will renegotiate its bailout package as the Troika – the EU, ECB and the IMF – is scheduled to meet Finance Minister Yannis Stournaras on July 5. As European policy makers make a greater push towards fiscal integration, the increased effort to address the debt crisis may give the European Central Bank scope to maintain its current policy in July, but we may see the Governing Council take additional steps to shore up the ailing economy as the region faces a growing threat for a prolonged recession.

Indeed, there’s still a wide range of views on what the ECB will do at the rate decision on Thursday, but we should see the central bank implement a range of tools throughout the second-half of the year as growth and inflation falter. In our view, it seems as though the Governing Council will most likely lean towards a rate cut this week as the recent development coming out of the euro-area continues to reflect the ongoing slack within the real economy, and ECB President Mario Draghi may see scope to implement a zero-interest rate policy as the ongoing threat for contagion dampens the fundamental outlook for the region. 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 should see the exchange fall back towards the lower bounds of its recent range (1.2400), but we may see a sharp selloff in the euro-dollar should the ECB take a very aggressive approach in addressing the risks surrounding the region.

British Pound: Struggles To Hold Above 61.8% Fib Ahead Of BoE Rate Decision

The British Pound gave back the advance to 1.5712 as the developments coming out of the U.K. continued to reflect a slowing recovery, and we will be closely watching the range-bounce price action carried over from June as the GBPUSD appears to be carving out a top around the 61.8% Fib from the 2009 low to high around 1.5690-1.5700. As market participants see the Bank of England expanding its asset purchase program beyond the GBP 325B target later this week, we may see the pound-dollar give back the rebound from June and the pair may ultimately come up against the 50.0% Fib around the 1.5270 figure should the Monetary Policy Committee strike a very dovish tone for monetary policy. However, another 5-4 split within the MPC could produce a bullish breakout in the exchange rate, and we may see the majority continue to endorse a wait-and-see approach as policy makers expect the recovery to gradually gather pace throughout the second-half of the year.

U.S. Dollar: Tracks Higher Ahead Of Holiday Trade, Choppy Prices Ahead

The greenback continued to gain ground on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a high of 10,089, but the reserve currency may struggle to hold its ground during the North American trade as market participants appear to be increasing their appetite for risk. As the economic docket remains fairly light during the holiday trade, we should see risk trends dictate price action across the currency market, but traders may face choppy price action as market participation wanes. Nevertheless, the dollar may continue to consolidate ahead of the highly anticipated Non-Farm Payrolls on tap for Friday as employment in the world’s largest economy is expected to increase another 90K in June, and the development may continue to dampen expectations for additional monetary support as the recovery gradually gathers pace.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Factory Orders (MAY)

0.1%

-0.6%

USD

21:00

17:00

Total Vehicle Sales (JUN)

13.90M

13.73M

USD

21:00

17:00

Domestic Vehicle Sales (JUN)

10.90M

10.75M

GBP

23:01

19:01

BRC Shop Price Index (YoY) (JUN)

1.5%

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Monetary Base (YoY) (JUN)

--

5.9%

Fastest pace of growth since February.

NZD

1:00

ANZ Commodity Price (JUN)

--

-2.4%

Weakens for the fifth month.

CNY

1:00

Purchasing Manager Index Non-Manufacturing (JUN)

--

56.7

Highest since March.

JPY

1:30

Labor Cash Earnings (YoY) (MAY)

--

-0.8%

Falls for the first time since January.

AUD

1:30

Building Approvals (MoM) (MAY)

5.0%

27.3%

Biggest advance since the series began in 1980.

AUD

1:30

Building Approvals (YoY) (MAY)

-15.2%

9.3%

AUD

4:30

Reserve Bank of Australia Interest Rate Decision

3.50%

3.50%

Maintains dovish tone, sees slower growth in China.

GBP

8:30

Purchasing Manager Index Construction (JUN)

52.9

48.2

Contracts for the first time since December 2010.

GBP

8:30

Mortgage Approvals (MAY)

50.0K

51.1K

Holds above 51K for the second month.

GBP

8:30

Net Consumer Credit (MAY)

0.2B

0.7B

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8:30

Net Lending Sec. on Dwellings (MAY)

1.0B

0.6B

GBP

8:30

M4 Money Supply (MoM) (MAY)

--

-0.1%

Contracts for the third time this year.

GBP

8:30

M4 Money Supply (YoY) (MAY)

--

-4.1%

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8:30

M4 Money Supply ex IOFCs (3M) (Annualised) (MAY)

--

3.6%

EUR

9:00

Euro-Zone Producer Price Index (MoM) (MAY)

-0.3%

-0.5%

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Euro-Zone Producer Price Index (YoY) (MAY)

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2.3%

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