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Euro Rally Slows Amid Growing Uncertainties, Spain To Tap EUR 60B

Euro Rally Slows Amid Growing Uncertainties, Spain To Tap EUR 60B

David Song, Strategist

Talking Points

  • Euro: Bundesbank Continues To Oppose Bond Purchases, Spain To Tap EUR 60B
  • British Pound: Maintains Upward Trend, BoE Says QE Prevented Deeper Recession
  • U.S. Dollar: Continues To Consolidate Ahead Of Jackson Hole, Dallas Fed On Tap

Euro: Bundesbank Continues To Oppose Bond Purchases, Spain To Tap EUR 60B

The Euro is holding within Friday’s range as Bundesbank President Jens Weidmann continued to speak out against the bond purchase program and warned that ‘central bank financing can be as addictive as a drug,’ while Spain is expected to tap EUR 60B of the bank bailout program in an effort to shore up the ailing economy. However, as Spain’s increase in the value-added-tax comes into effect in September, the ongoing push for austerity certainly raises the threat for a prolonged recession, and the lack of clarity surrounding the policy outlook may continue to drag on the EURUSD as European officials persistently struggle to meet on common ground.

As the EURUSD struggles to push above the 100-Day SMA (1.2604), we will continue to watch the short-term pullback in the relative strength index for confirmation, and the pair may ultimately carve out a lower top ahead of September as the economic docket for this week is expected to reinforce a weakened outlook for the euro-area. In turn, we may see the downward trend carried over from 2011 continue to take shape, and we would like to see the EURUSD break and close below the 20-Day SMA (1.2369) to see a larger reversal in the exchange rate.

British Pound: Maintains Upward Trend, BoE Says QE Prevented Deeper Recession

The British Pound pared the decline to 1.5796 as there appears to be a rebound in risk sentiment, and the sterling may resume the advance from earlier this month as the slew of event risks on tap for this week is anticipate to encourage an improved outlook for the U.K. Meanwhile, Bank of England board member Spencer Dale argued that the central bank’s asset purchase program has helped to prevent a deeper recession in Britain, and went onto say that the region is still ‘laboring under the effects of the financial crisis’ as the Monetary Policy Committee continues to see a risk of undershooting the 2% target for inflation. However, as the U.K. government continues to embark on its budget-cutting measures, the effort to balance public finances may continue to increase the appeal of the sterling, and the GBPUSD may continue to retrace the decline from earlier this year as the ascending channel from July continues to take shape. Nevertheless, we will keep a close eye on the relative strength index as it continues to move away from overbought territory, and we will look to buy dips in the exchange rate as the BoE reverts back to a wait-and-see approach.

U.S. Dollar: Continues To Consolidate Ahead Of Jackson Hole, Dallas Fed On Tap

The greenback continued to recoup the losses from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,015, but the reserve currency may come under pressure during the North American trade as there appears to be a pickup in risk-taking behavior. As market sentiment continues to dictate price action across the major currencies, the rise in market sentiment may continue to bear down on the dollar, but an uptick in the Dallas Fed Manufacturing index may spark a bullish reaction in the USD as it dampens the case for additional monetary support. Nevertheless, we may see the greenback track sideways ahead of the Jackson Hole Economic Symposium as currency traders weigh the outlook for monetary policy, and Fed Chairman Ben Bernanke may refrain from hinting at another round of quantitative easing as the economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:30

10:30

Dallas Fed Manufacturing Activity (AUG)

-8.0

-13.2

EUR

16:00

12:00

French Total Jobseekers Change (JUL)

22.0

23.7

EUR

16:00

12:00

French Total Jobseekers (JUL)

2960.0k

2945.8k

USD

16:15

12:15

Fed's Sandra Pianalto Speaks on U.S. Economy

--- 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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