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Euro Tumbles As ECB Disappoints, Sterling To Threaten Range On BoE

Euro Tumbles As ECB Disappoints, Sterling To Threaten Range On BoE

2012-08-02 14:20:00
David Song, Strategist

Talking Points

  • Euro: ECB Disappoints, Pledges Further Monetary Support
  • British Pound: Preserves Range-Bounce Prices As BoE Maintains Current Policy

Euro: ECB Disappoints, Pledges Further Monetary Support

The Euro tumbled to a fresh weekly low of 1.2172 as the European Central Bank interest rate decision fell short of market expectations, and the single currency may continue to give back the rebound from the previous month (1.2042) as the fundamental outlook for the region turns increasingly bleak. After holding the benchmark interest rate at 0.75%, the ECB pledged to take additional steps to shore up the ailing economy amid the heightening risk for contagion, but we may see President Mario Draghi struggle to push through additional non-standard measures as there appears to be a growing rift within the Governing Council.

Indeed, one member of the board dissented against the decision as the ECB struck a highly dovish tone for monetary policy, and it seems as though the central bank will implement a range of tools over the coming months as the governments operating under the monetary union become increasingly reliant on monetary policy. In turn, we are looking for additional rate cuts paired with more bond purchases amid the ongoing turmoil in the financial system, but the lack of clarity in the policy outlook may weaken the EURUSD further as European officials struggle to restore investor confidence. As the EURUSD failed to clear the 50-Day SMA (1.2410), we’re seeing the relative strength index preserve the downward trend from earlier this year, and we will maintain our bearish bias for the euro-dollar as it appears to be carving out a lower top coming into August. In turn, we should see the bearish sentiment surrounding the single currency gather pace in the days ahead, and the pair looks poised for fresh yearly lows as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: Preserves Range-Bounce Prices As BoE Maintains Current Policy

The British Pound gave back the overnight advance to 1.5678 even as the Bank of England stuck to its current policy in August, and we may see the central bank preserve a wait-and-see approach over the coming months as the new Funding for Lending program gets underway. As the Monetary Policy Committee refrains from releasing a policy statement, market participants will certainly look towards the BoE Minutes due out on August 15, but the quarterly inflation report on tap for next week may dampen the appeal of the sterling should the central bank show a greater willingness to expand monetary policy further. As we wait to hear from the BoE, we should see the GBPUSD maintain the range-bounce price action carried over from the previous month, but the pair may threaten support around the 1.5400 figure should the central bank fuel speculation for more quantitative easing.

--- Written by David Song, Currency Analyst

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

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