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Euro At Critical Juncture, Sterling Struggles Ahead Of 2Q GDP

Euro At Critical Juncture, Sterling Struggles Ahead Of 2Q GDP

David Song, Strategist

Talking Points

  • Euro: Spanish Yields Hit Record-High, Greece May Fail To Meet Obligations
  • British Pound: Holds June Range Ahead Of 2Q GDP, 50.0% Fib In Sight
  • U.S. Dollar: Carves Out Higher Low In July, All Eyes On 2Q GDP

Euro: Spanish Yields Hit Record-High, Greece May Fail To Meet Obligations

The Euro tumbled to a fresh yearly low of 1.2081 as the yield tied to Spain’s 10-Year debt exceed 7.5% for the first time since the monetary union was created in 1999, while there’s growing concerns that Greece will struggle to meet its obligations as the troika – the EU, ECB, and IMF – are unlikely to release the next bailout installment until September. In response, German Vice Chancellor Philipp Roesler warned that he’s ‘very skeptical’ that the EU will be able to save Greece, and argued that ‘there can be no more payments’ for the periphery country should the government fail to stay afloat.

As the fundamental outlook for the euro-area turns increasingly bleak, market participants are still pricing an 83 percent change for a 25bp rate cut in August according to Credit Suisse overnight index swaps, and we should see the Governing Council continue to embark on its easing cycle throughout the second-half of the year as European policy makers maintain a reactionary approach in addressing the debt crisis. However, the ECB may have little choice but to implement a range of tools over the coming months as the region heads for a prolonged recession, and we may see the central bank lean towards a zero interest rate policy (ZIRP) in an effort to stem the downside risks for growth and inflation. As the downward trend carried over from 2011 continues to take shape, we will stick by our bearish forecast for the EURUSD, but we will keep a close eye on the relative strength index as it approaches oversold territory. If the RSI break below 30, we should see the EURUSD continue to give back the rebound from 2010 (1.1875), but a rebound from its current level may produce a run at former support around 1.2350, which lines up with the 20-Day SMA at 1.2352.

British Pound: Holds June Range Ahead Of 2Q GDP, 50.0% Fib In Sight

The British Pound continued to give back the advance from the previous week to maintain the range-bounce price action from June, but the sterling may struggle to hold its ground in the coming days as the economic docket is expected to show a weakening outlook for the U.K. As the advanced GDP report is expected to show the economy contracting another 0.2% in the second-quarter, fears of a protracted recession may fuel expectations for additional monetary support, and the Bank of England may look to conduct additional quantitative easing over the coming as the central bank sees a renewed risk of undershooting the 2% target for inflation. In turn, we may see the GBPUSD continue to retrace the rebound from 1.5392, but we may see the pair make another run at the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270 should the GDP report fuel speculation for more QE.

U.S. Dollar: Carves Out Higher Low In July, All Eyes On 2Q GDP

The greenback continued to gain ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,155, and the reserve currency may appreciate further during the North American trade as the flight to safety gathers pace. As the economic docket remains fairly light for the next 24-hours of trading, we should see risk sentiment continue to dictate price action across the major currencies, and we will maintain our bullish forecast for the greenback as the index carves out a higher low in July. However, as the second-quarter GDP report is expected to reflect a slowing recovery, a dismal growth print could fuel speculation for another round of quantitative easing, but the FOMC may stick to the sidelines for the remainder of the year as the world’s largest economy gets on a more sustainable path.

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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