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EUR Rallies on Greater Support for Bond Purchases, GBP Breaks Out

EUR Rallies on Greater Support for Bond Purchases, GBP Breaks Out

2012-08-21 13:05:00
David Song, Strategist

Talking Points

  • Euro: ECB’s Asmussen Endorses Bond Program, Fitch Sees Further Downgrades
  • British Pound: Breaks Out Of June Range, Upward Trend To Take Shape

Euro: ECB’s Asmussen Endorses Bond Program, Fitch Sees Further Downgrades

The Euro rallied to a fresh monthly high of 1.2464 as European Central Bank board member Jorg Asmussen, who was appointed by Germany Chancellor Angela Merkel back in January, endorsed an unlimited bond purchasing program to tackle the debt crisis, while there’s talk that Greece may get an extension to meet its budget target as European leaders convene this week. At the same time, Spain sold EUR 4.51B in debt, with the 12-month bill yielding 3.07% versus the 3.918% offered in July, but the relief rally in the EURUSD is likely to be short-lived as the debt crisis continues to drag on the real economy.

Indeed, Fitch Ratings warned that the euro-area may face further credit rating downgrades as the deepening recession across the periphery countries ‘are eating away at political support for austerity and political support for the euro,’ and we are likely to see the single currency face additional headwinds over the near-term as the fundamental outlook for the region remains bleak. As the EURUSD approaches the top of its current range, the series of higher lows may ultimately produce a bullish breakout in the exchange rate, but we would like to see a close above the 50-Day SMA (1.2375) to see the pair continue to retrace the decline from the previous month.

British Pound: Breaks Out Of June Range, Upward Trend To Take Shape

The British Pound hit a fresh monthly high of 1.5778 amid the rise in market sentiment, and the GBPUSD looks poised to track higher over the near-term as it breaks out of the range-bound price action carried over from June. As the GBPUSD finally clears the 100-Day SMA (1.5744), we should see an upward trending channel take shape, and the bullish sentiment underlining the sterling may gather pace going into September as the Bank of England reverts back to a wait-and-see approach. Nevertheless, we will be keeping a close eye on the relative strength index as the oscillator approaches 60 for the first time since May, but the short-term moving averages (10, 20 and 50-Day) reinforce a bullish outlook for the pair as they start to break away from one another.

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--- Written by David Song, Currency Analyst

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

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