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Euro Eyes Fresh Lows On Growth Concerns, Sterling To Face 2Q GDP

Euro Eyes Fresh Lows On Growth Concerns, Sterling To Face 2Q GDP

David Song, Strategist

Talking Points

  • Euro: EU Approves EUR 100B Bailout, Spain To Contract in 2013
  • British Pound: Maintains Range, U.K. GDP To Contract In 2Q

Euro: EU Approves EUR 100B Bailout, Spain To Contract in 2013

The Euro slipped to an overnight low of 1.2185 as Spain lowered its growth forecast for 2013 and sees the economy contracting 0.5% in the year ahead, and the EURUSD may face additional headwinds over the near-term as European policy makers maintain a reactionary approach in addressing the debt crisis. In response, euro-area finance ministers approved the EUR 100B bailout for Spain, while the European Commission pledged to find a ‘technical solution’ for Greece as heightening finance costs across the periphery countries heightens the risk for contagion.

As the fundamental outlook for the region deteriorates, market participants are still pricing an 83% chance for another 25bp rate cut in August according to Credit Suisse overnight index swaps, but the Governing Council may have little choice but to implement a range of tools to shore up the ailing economy as the region heads for a prolonged recession. In turn, we will maintain our bearish outlook for the EURUSD, and we anticipate to see fresh yearly lows in the exchange rate as the ECB remains poised to carry out its easing cycle over the remainder of the year. However, we will be keeping a close eye on the relative strength index as it approaches oversold territory, and we are looking to sell rallies in the EURUSD as the downward trend from 2011 continues to take shape.

British Pound: Maintains Range, U.K. GDP To Contract In 2Q

The British Pound pared the rally from earlier this week to maintain the range-bounce price action carried over from June, and the sterling may continue to track sideways in the week ahead as market participants weigh the outlook for monetary policy. Indeed, there’s growing expectations that the Bank of England will take additional steps to stimulate the ailing economy as the central bank sees a renewed risk of undershooting the 2% target for inflation, and we may see the GBPUSD continue to give back the rebound from earlier this month as the economic docket is expected to show the U.K. contracting another 0.2% in the second quarter. As a result, we may see the GBPUSD come under pressure next week, and a move below 1.5392 may spark a run at the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270 as market participants increase bets for additional monetary support.

--- 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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