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Euro Outlook Weighed By Spain, Sterling Poised For Bullish Breakout

Euro Outlook Weighed By Spain, Sterling Poised For Bullish Breakout

David Song, Strategist

Talking Points

  • Euro: Spain To Tap EUR 30B, Core CPI Highest Since 2009
  • British Pound: U.K. Retail Sales Tips Higher, RSI Approaching Resistance
  • U.S. Dollar: Housing Starts Disappoint, Building Permits Jump In July

Euro: Spain To Tap EUR 30B, Core CPI Highest Since 2009

The Euro slipped to an overnight low of 1.2254 on talks that Spain will utilize the EUR 30B tranche that will be ‘mobilized in any contingency’ as the European Central Bank passed greater restrictions on commercial bank borrowing, and the ongoing turmoil in the financial system continues to cast a weakened outlook for the region as European policy makers maintain a reactionary approach in addressing the debt crisis. In response, the EU announced that ‘the commission has not received any request from the Spanish authorities,’ and the negative headlines coming out of the euro-area may continue to drag on the exchange rate as the threat for contagion continues to drag on investor confidence.

At the same time, we saw the headline reading for euro-area inflation hold steady at 2.4% for the third consecutive month in July, while the core CPI advanced 1.7% during the same period to mark the fastest pace of growth since February 2009. Indeed, the stickiness in underlying price growth limits the ECB’s scope to shore up the ailing economy as it maintains its one and only mandate to ensure price stability, and we may see a growing rift within the Governing Council as President Mario Draghi makes a greater push to expand the balance sheet further. As the EURUSD remains capped by the 50-Day SMA (1.2381), the pair looks poised to retrace the rebound from 1.2041, and we anticipate to see fresh yearly lows in the exchange rate as the region faces a growing risk for a prolonged recession.

British Pound: U.K. Retail Sales Tips Higher, RSI Approaching Resistance

The British Pound snapped back from an overnight low of 1.5635 as retail spending in the U.K. unexpectedly increased in July, and the sterling may continue to track higher over the remainder of the week as the GBPUSD appears to be carving out a series of higher highs paired with higher lows. Indeed, we would like to see the pound-dollar make a close above the 200-Day SMA (1.5715) to see an upward trending channel take shape, and we will be keeping a close eye on the relative strength index as it approaches interim resistance around the 58 figure. As the recent batch of data coming out of the U.K. raises the outlook for growth and inflation, easing bets for additional monetary support should prop up sterling, and we may see a bullish breakout in the exchange rate as the Bank of England endorses a wait-and-see approach for the near-term.

U.S. Dollar: Housing Starts Disappoint, Building Permits Jump In July

The greenback is struggling to hold its ground going into the North American, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 10,077, and the reserve currency may consolidate further over the next 24-hours of trading as market sentiment appears to be picking up. Although U.S. Housing Starts weakened 1.1% in July, building permits increased 6.8% to 812K to mark the highest reading since August 2008. As the recovery gradually gathers pace, we should see the FOMC maintain its current policy throughout the remainder of the year, and Fed Chairman Ben Bernanke may continue to talk down speculation for QE3 at the central bank conference in Jackson Hole as the fundamental outlook for the world’s largest economy continues to improve.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Philadelphia Fed. (AUG)

-4.0

-12.9

CAD

14:30

10:30

Bank of Canada Publishes Review Collection of Academic Papers

NZD

22:45

18:45

Producer Prices- Inputs (QoQ) (2Q)

0.3%

NZD

22:45

18:45

Producer Prices- Outputs (QoQ) (2Q)

-0.2%

-0.1%

--- 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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