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Euro Struggles Amid German Resistance, Bearish Trend Remains Intact

Euro Struggles Amid German Resistance, Bearish Trend Remains Intact

David Song, Strategist

Talking Points

  • Euro: Germany Opposes Bond Purchases Ahead Of ECB Rate Decision
  • British Pound: Moody’s Sees ‘Rising Challenges’ In U.K., Support At 1.5425

Euro: Germany Opposes Bond Purchases, Banking License For ESM

The Euro fell back from a high of 1.2318 as German policy makers warned that the European Central Bank’s asset purchase program presents ‘incalculable risks,’ and while Germany’s Finance Ministry talked down the scope of empowering the European Stability Mechanism with a banking license. However, as unemployment in the euro-area remains at a record-high, the ECB is widely expected to carry out its easing cycle throughout the second-half of the year, and we may see the Governing Council roll out with a range of tools to stimulate the ailing economy as it heads for a prolonged recession.

Nevertheless, a Bloomberg News survey shows 51 of the 55 economists polled forecasting the ECB to keep the benchmark interest rate at 0.75%, while investors are still pricing an 83% chance for a 25bp rate cut in August according to Credit Suisse overnight index swaps. In turn, the mixed outlook surrounding the rate decision may produce further declines in the EURUSD, but we may see another relief rally in the single currency should the central bank take a more aggressive approach in addressing the downside risks for the region. As the relative strength index on the EURUSD maintains the downward trend from earlier this year, we will preserve our bearish forecast for the pair, and hopes surrounding the rate decision may continue to taper off as European policy makers struggle to meet on common ground.

British Pound: Moody’s Sees ‘Rising Challenges’ In U.K., Support At 1.5425

The British Pound continued to give back the advance from the previous week as Moody’s Investor Services curbs its outlook for the U.K. amid ‘rising challenges in achieving debt reduction,’ and the sterling may continue to consolidate ahead of the Bank of England interest rate decision as it maintains the range-bounce price action carried over from June. As Britain remains stuck in a double-dip recession, we may see the BoE continue to strike a dovish tone for monetary policy, and speculation for more easing may threaten the sideways price action in the GBPUSD as rate expectations deteriorate further. In turn, we may see the pound-dollar continue to work its way towards interim support around the 1.5425 figure, but the pair may hold the range going forward should the BoE refrain from releasing a policy statement.

--- Written by David Song, Currency Analyst

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

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