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Euro Falters Amid Deepening Recession, ECB Talks Up Bond Purchases

Euro Falters Amid Deepening Recession, ECB Talks Up Bond Purchases

2012-08-09 13:25:00
David Song, Strategist
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Talking Points

  • Euro: Greek Unemployment Hits Record-High, ECB Report Casts Dour Outlook
  • British Pound: Former BoE Member Strikes Cautious Tone, Range Still In Play
  • U.S. Dollar: Index Maintains Upward Trend, Reversal To Gather Pace

Euro: Greek Unemployment Hits Record-High, ECB Report Casts Dour Outlook

The Euro tumbled to a fresh weekly low of 1.2292 as unemployment amongst Greek youths jumped to a record-high of 54.9% in May, while the European Central Bank’s monthly report highlighted a deepening recession as the group of professional forecasters lowered their forecast for growth and inflation. Indeed, the economy is anticipated to face a bigger contraction this year as GDP is projected to fall 0.3% versus an initial forecast for a 0.2% decline, while inflation is expected to undershoot the 2% target in 2013.

As the sovereign debt crisis continues to drag on the real economy, ECB board member Christian Noyer said the bond purchase program ‘will be sufficient to have a strong impact on the markets,’ and went onto say that the Governing Council will ‘intervene very quickly’ while ‘favoring bonds with shorter maturities’ amid the heightening threat for contagion. However, the renewed effort to tackle the debt crisis will only help to buy more time as the governments operating under the single currency struggle to get their house in order, and we should see the ECB carry out its easing cycle throughout the second-half of the year in an effort to stem the downside side risks for the region. As the EURUSD finds interim resistance around the 1.2400 figure, the pair looks poised to give back the rebound from July (1.2041), and we should see the downward trend in the euro-dollar continue to take shape as European policy makers struggle to restore investor confidence.

British Pound: Former BoE Member Strikes Cautious Tone, Range Still In Play

The British Pound maintain the range-bound price action from earlier this week as it gave back the overnight advance to 1.5684, and the sterling may continue to consolidate over the remainder of the week as market participants scaled back their appetite for risk. Meanwhile, former Bank of England Deputy Governor John Gieve argued that the central bank was ‘a bit slow off the mark’ in tacking the financial crisis, and held a cautious outlook for the U.K. as the ‘economy is stagnating.’ Although BoE Governor Mervyn King talked down speculation for lower borrowing in Britain, the central bank may have little choice but to expand monetary policy further as the region faces a prolonged economic downturn. Nevertheless, with the BoE Minutes on tap for the following week, we will keep a close eye on the range between 1.5500-1.5750, but the pair appears to be carving out an upward trending channel amid the series of higher highs paired with higher lows carried over from July.

U.S. Dollar: Index Maintains Upward Trend, Reversal To Gather Pace

The greenback tracked higher on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh weekly 10,030, and the reserve currency may track higher throughout the North American trade as it benefits from safe-haven flows. As the economic docket remains fairly light over the next 24-hours of trading, risk sentiment should continue to dictate price action going into the end of the week, and the greenback looks poised for a sharp reversal as the index maintains the upward trend from earlier this year.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Wholesale Inventories (JUN)

0.3%

0.3%

NZD

22:45

18:45

Card Spending (MoM) (JUL)

0.3%

NZD

22:45

18:45

Card Spending - Retail (MoM) (JUL)

0.4%

--- 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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