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Euro Optimism To Fizzle Amid Renewed Threats For Greek Default

Euro Optimism To Fizzle Amid Renewed Threats For Greek Default

2012-07-25 12:40:00
David Song, Strategist
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Talking Points

  • Euro: ECB Favors Banking License For ESM, Fears Of Greek Default Resurface
  • British Pound: Holds Range Despite Largest GDP Contraction Since 2009

Euro: ECB Favors Banking License For ESM, Fears Of Greek Default Resurface

The Euro climbed to an overnight high of 1.2169 as European Central Bank board member Ewald Nowotny floated the idea of broadening the powers of the European Stability Mechanism and empowering the permanent bailout fund with a banking license, but we may see the EU maintain a reactionary approach as the group struggles to meet on common ground. Meanwhile, policy makers in Germany warned that Greece may need another debt restructuring as the troika – the EU, ECB, and the IMF – is not expected to release the next bailout payment until September, and we should see the Governing Council continue to embark on its easing cycle throughout the remainder of the year as the region head towards a prolonged recession.

As the ECB warns of tightening credit conditions across the euro-area, we may see the central bank lean towards a zero interest rate policy (ZIRP) over the coming months, but the Governing Council may have little choice but to bring back its non-standard measures as the outlook for growth and inflation deteriorates. As the relative strength index on the EURUSD bounces back from oversold territory, the short-term correction may spark a run at the 20-Day SMA (1.2315), but we will look to sell rallies in the euro-dollar as the oscillator maintains the downward trend from earlier this year.

British Pound: Holds Range Despite Largest GDP Contraction Since 2009

The British Pound held the range-bounce price action from the previous month despite the dismal GDP report, and the sterling may continue to track sideways over the near-term as market participants weigh the outlook for monetary policy. Indeed, economic activity contracted 0.7% in the second quarter to mark the biggest decline since the first three-months of 2009, and the deepening recession may encourage the Bank of England to expand its balance sheet further as central bank officials see a growing risk of undershooting the 2% target for inflation. As the GBPUSD continues to hold above the monthly low (1.5392), we should see the pair hold steady ahead of the BoE interest rate decision on tap for August 2, but we may see the central bank refrain from releasing a policy statement should they revert back to a wait-and-see approach.

--- 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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