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Euro Rally Fizzles on Contagion Fear, Pound Holds Range Ahead Of BoE

Euro Rally Fizzles on Contagion Fear, Pound Holds Range Ahead Of BoE

David Song, Strategist

Talking Points

  • Euro: Spanish Bank Borrowing Hits Record-High, GDP Contracts 0.2%
  • British Pound: U.K. Inflation Tops Forecast, Remains Capped By 100-Day SMA

Euro: Spanish Bank Borrowing Hits Record-High, GDP Contracts 0.2%

The Euro pared the overnight advance to 1.2384 as commercial bank in Spain borrowed a record EUR 376B from the European Central Bank in July, while the advance GDP report showed the growth rate contracting 0.2% in the second-quarter after holding flat during the first-three months of 2012. As the debt crisis continues to drag on the real economy, there were reports that Germany’s highest court will not delay its ruling on the European Stability Mechanism scheduled for September 12, and it seems as though the European Central Bank will implement a range of tools over the coming months as the region face a growing risk for a prolonged recession.

Beyond the bond purchase program, market participants are still pricing an 83% chance for a 25bp rate cut according to Credit Suisse overnight index swaps, and we may see the ECB push the benchmark interest rate to a fresh record low at the September 6 meeting as the Governing Council waits for Germany to approve the permanent bailout package. As the EURUSD remains capped by the 50-Day SMA at 1.2393, we should see the exchange rate consolidate going into the middle of the week, and we will maintain our bearish outlook for the pair as it continues to carve out a lower top in August. With the GDP report out of the way, we will be keeping a close eye on the CPI figures due out on Thursday, and easing price pressures across the euro-area may produce a bearish reaction in the EURUSD as it raises the risk of undershooting the 2% target for inflation.

British Pound: U.K. Inflation Tops Forecast, Remains Capped By 100-Day SMA

The British Pound spiked to a high of 1.5728 as the headline reading for U.K. inflation unexpectedly tipped higher in July, and sticky prices may continue to prop up the sterling as it dampens the scope for additional monetary easing. Indeed, consumer prices increased an annualized 2.6% in July after expanding 2.4% the month prior, while the core rate of inflation advanced 2.3% during the same period to mark the fastest pace of growth since March. As market participants turn their attention to the Bank of England Minutes on tap for tomorrow, we’re more interested in seeing the vote count as Governor Mervyn King talks down speculation for a rate cut, and it seems as though the Monetary Policy Committee will endorse a wait-and-see approach over the coming months as growth and inflation gradually picks up. Despite the strong inflation print, the GBPUSD has made another failed attempt to test the 100-Day SMA at 1.5756, and we may see the pound-dollar consolidate in the days ahead as it maintains the range-bound price action carried over from June.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

IBD/TIPP Economic Optimism (AUG)

47

47

USD

14:00

10:00

Business Inventories (JUN)

0.3%

0.3%

--- 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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