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Euro Rallies As ECB Pledges More Support, Sterling Range In Focus

Euro Rallies As ECB Pledges More Support, Sterling Range In Focus

2012-07-26 12:05:00
David Song, Strategist
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Talking Points

  • Euro: ECB ‘To Do Whatever It Takes,’ Portugal To Contract In 2013
  • British Pound: Capped By 200-Day SMA, BoE Calls For International Cooperation

Euro: ECB ‘To Do Whatever It Takes,’ Portugal To Contract In 2013

The Euro rallied to 1.2286 as European Central Bank President Mario Draghi announced that the Governing Council ‘is ready to do whatever it takes to preserve the euro,’ but the relief rally in the EURUSD is likely to be short-lived as the fundamental outlook for the region turns increasingly bleak. Indeed, Italy sold EUR 2.5B in 2014 bonds yielding 4.86%, which compares to the 4.712% offered in June, while the Organization for Economic Cooperation and Development struck a weakened outlook for the euro-area as the group sees Portugal contracting for the third straight year in 2013.

At the same time, there were reports that Greek Finance Minister Yannis Stournaras is trying to obtain a two-year extension from the troika – the ECB, EU, and the IMF – to implement its budget reforms, and the heightening threat for contagion paired with the growing risk for a prolonged economic downturn continues to cast a bearish outlook for the EURUSD as the governments operating under the fixed-exchange rate system become increasingly reliant on external assistance. As the EURUSD struggles to clear the 20-Day SMA at 1.2306, we may see the pair consolidate going into the end of the week, and we will keep a close eye on the relative strength index as the downward trend in the oscillator continues to take shape.

British Pound: Capped By 200-Day SMA, BoE Calls For International Cooperation

The British Pound advanced to 1.5648 amid the rise in risk sentiment, but we may see a short-term pullback in the GBPUSD as the pair maintains the sideways price action carried over from the previous month. As the pound-dollar remains capped by the 200-Day SMA (1.5742), we should have an opportunity to play the range-bounce price action over the coming days, but the sterling may face additional headwinds over the near-term as the Bank of England continues to strike a dovish tone for monetary policy. BoE Governor warned that it may take international cooperation to address the turmoil in the world economy, and we may see the central bank continue to carry out its easing cycle in 2012 as the debt crisis continues to dampen the outlook for the U.K. As market participants turn their attention to the BoE interest rate decision on tap for the following week, we should see the GBPUSD track sideways going into the policy meeting, but we may see the central bank refrain from releasing a policy statement as 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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