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Euro Struggles Ahead Of Spanish Bailout Vote, Sterling Looks Higher

Euro Struggles Ahead Of Spanish Bailout Vote, Sterling Looks Higher

David Song, Strategist

Talking Points

  • Euro: Spain Yields Push Higher Ahead Of Bailout Vote, Germany In Focus
  • British Pound: Eyes 100-Day SMA Even As U.K. Retail Sales Disappoints
  • U.S. Dollar: Index Hits Fresh Monthly Low, Existing Home Sales On Tap

Euro: Spain Yields Push Higher Ahead Of Bailout Vote, Germany In Focus

The Euro pared the overnight advance to 1.2323 as Spain sold EUR 2.98B in notes with an average yield of 6.459%, which compares to the 6.072% offered in June, and the headline-driven market may continue to push the EURUSD lower over the next 24-hours of trading as European policy makers struggle to restore investor confidence. As the EU is scheduled to discuss the EUR 100B bailout later today, all eyes are on Germany as the parliament plans to vote on the rescue package later today, but a relief rally in the single currency may be short-lived as the fundamental outlook for the region turns increasingly bleak.

Indeed, market participants see Germany approving the extraordinary measure for Spain in an effort to stem the risk for contagion, but the threat of a prolonged recession continues to instill a bearish outlook for the Euro as the International Monetary Fund sees ‘a sizable risk’ for deflation. In turn, the group argued that the European Central Bank should pump more liquidity into the system through its asset purchase program, and the Governing Council may have little choice but to implement a range of tools over the coming months as growth and inflation falter. As European policy makers increase their effort to tackle the debt crisis, the EURUSD looks primed for a relief rally, but we will look to sell advances in the pair as the downward trend carried over from the previous year continues to take shape. In turn, we may see the EURUSD make a run at 20-Day SMA (1.2394), and we will be watching the relative strength index for confirmation as it remains in a downward trend.

British Pound: Eyes 100-Day SMA Even As U.K. Retail Sales Disappoints

The British Pound extended the advance from earlier this week even as the U.K. retail sales report fell short of market expectations, and the sterling may track higher over the remainder of the week as market sentiment improves. The GBPUSD looks to be eyeing the 100-Day SMA (1.5788) as it breaks out of the downward trending channel carried over from the previous month, and we may see the pound-dollar continue to retrace the decline from earlier this year as the exchange rate carves out a higher low in July. However, the dovish tone held by the Bank of England may continue to produce range-bound prices in the GBPUSD as the central bank talks up speculation for lower borrowing costs, and we may see the pair struggle to hold above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700 as BoE Governor Mervyn King continues to highlight the risk of undershooting the 2% target for inflation.

U.S. Dollar: Index Hits Fresh Monthly Low, Existing Home Sales On Tap

The greenback remains under pressure on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a fresh monthly low of 10,036, and the reserve currency may track lower during the North American trade as market participants increase their appetite for risk. As European policy makers are expected to discuss Spain’s EUR 100B bailout later today, the rise in trader sentiment may gather pace over the next 24-hours of trading, but we may see increased demands for the dollar should the group struggle to meet on common ground. Nevertheless, existing home sales in the world’s largest economy is expected to rebound in June, the pickup in the housing market may increase the appeal of the greenback, and we may see the reserve currency recoup the losses from earlier this week should the data dampen the scope for additional quantitative easing.

--- 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

Philadelphia Fed. (JUL)

-8.0

-16.6

USD

14:00

10:00

Existing Home Sales (JUN)

4.62M

4.55M

USD

14:00

10:00

Existing Home Sales (MoM) (JUN)

1.5%

-1.5%

USD

14:00

10:00

Leading Indicators (JUN)

-0.1%

0.3%

NZD

22:45

18:45

Net Migration s.a. (JUN)

160

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