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Euro Outlook Remains Bearish, Eyes 2010 Low On Bets For ECB Rate Cut

Euro Outlook Remains Bearish, Eyes 2010 Low On Bets For ECB Rate Cut

David Song, Strategist

Talking Points

  • Euro: ECB Maintains Dovish Tone, Raising Bets For Rate Cut In August
  • British Pound: Eyes June Low Ahead Of BoE Minutes, 50.0% Fib In Focus
  • U.S. Dollar: Index Breaks Out Of Range Ahead Of China GDP

Euro: ECB Maintains Dovish Tone, Raising Bets For Rate Cut In August

The Euro tumbled to a fresh yearly low of 1.2169 amid the weakening outlook for the region, and the pair may continue to track lower over the remainder of the week as the European Central Bank strikes a dovish tone for monetary policy. Indeed, the ECB warned that the downside risks for the region ‘have materialized’ in its monthly report, and went onto say that the fundamental outlook remains clouded by ‘heightened uncertainty’ as European policy makers struggle to stem the risk for contagion.

In turn, ECB board member Jozef Makuch said that the central bank ‘will use all the tools it has already used or new measures’ to shore up the ailing economy, and it seems as though the Governing Council is leaning towards a zero interest rate policy (ZIRP) as the region faces a threat for a prolonged recession. As the downward trend in the EURUSD continues to take shape, we will maintain our bearish forecast for the pair, and the euro-dollar looks poised to give back the rebound from 2010 (1.1875) as market participants expect to see lower borrowing costs in Europe. According to Credit Suisse overnight index swaps, investors are now pricing an 83% chance for a 25bp rate cut at the August 2 meeting, and we should see the Governing Council continue to embark on its easing cycle as growth and inflation falter.

British Pound: Eyes June Low Ahead Of BoE Minutes, 50.0% Fib In Focus

The British Pound continued to consolidate on Thursday, with the GBPUSD slipping to a fresh weekly low of 1.5432, and the sterling may continue to give back the rebound from 1.5268 as market participants scale back their appetite for risk. We may see the GBPUSD continue to trade within a broad range as it remains supported by the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270, but the Bank of England Minutes on tap for the week ahead may produce a meaningful move in the exchange rate as market participants weigh the outlook for monetary policy. Until then, we should see risk trends continue to dictate price action for the GBPUSD, and the pair may weaken further over the remainder of the week as the flight to safety picks up.

U.S. Dollar: Index Breaks Out Of Range Ahead Of China GDP

The near-term outlook for the greenback remains bullish as the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) breaks out of the range-bound price action carried over from the previous month, and the reserve currency may appreciate further over the next 24-hours of trading as market sentiment falters. As China’s 2Q GDP report comes into focus, we’re expecting to see growth expand at the slowest pace since 2009, fears of a ‘hard landing’ may continue to sap risk-taking behavior, and the short-term rally in the dollar may gather pace in the coming days as it continues to benefit from safe-haven flows.

--- 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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