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Euro Primed For Reversal As ECB Disappoints, Pound Propped Up By BoE

Euro Primed For Reversal As ECB Disappoints, Pound Propped Up By BoE

David Song, Strategist

Talking Points

  • Euro: ECB Disappoints After Holding Rates, Sees Deeper Contraction In 2012
  • British Pound: BoE Maintains Current Policy, U.K. To Create 140K Jobs

Euro: ECB Disappoints After Holding Rates, Sees Deeper Contraction In 2012

The Euro pared the advance to 1.2648 as European Central Bank President Mario Draghi merely reiterated the leaked remarks ahead of the rate decision, and we will maintain our bearish forecast for the EURUSD as it continues to carve a lower top around the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50. After holding the benchmark interest rate at 0.75%, ECB President Draghi announced that the Governing Council agreed on a sterilized, unlimited bond-purchasing program to tackle the debt crisis, but curbed speculation for a yield cap as the central bank looks to target short-term maturities.

Although the ECB argued that it wasn’t time to change rates, the central bank struck a weakening outlook for the euro-area as it now expects the economy to contract 0.4% in 2012, and we may see the council implement a range of tools over the near-term as the region remains at risk for a prolonged recession. As President Draghi fails to lay out additional details for the non-standard measure, uncertainties surrounding the policy outlook may continue to drag on the exchange rate, and we may see the EURUSD threaten the upward trend from the end of July as the central bank attempts to buy more time. In turn, we would like to see a break and a close below the 20-Day SMA (1.2464) to reinforce our bearish forecast, and the pair should resume the downward trend from 2011 as the relative strength index continues to move away from overbought territory.

British Pound: BoE Maintains Current Policy, U.K. To Create 140K Jobs

The British Pound tracked higher on Thursday as the Bank of England held the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and it seems as though the central bank will sit on the sidelines over the near to medium-term as the U.K. government steps up its effort to stimulate the ailing economy. Indeed, Prime Minister David Cameron plans to create 140K new jobs by easing regulatory requirements for homebuilders, and the BoE Minutes scheduled for September 19 may sap speculation for more quantitative easing as the new initiatives are expected to fuel private sector activity. As a result, we will maintain a bullish outlook for the GBPUSD as it maintains the upward trending channel from July, but the pair looks poised for a short-term correction as the relative strength index continues to approach overbought territory.

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ECB's Mersch, Coene Speak on Euro Economy

--- Written by David Song, Currency Analyst

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

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