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Euro Breaks Out On Growing ECB Support, Pound Poised For Correction

Euro Breaks Out On Growing ECB Support, Pound Poised For Correction

2012-09-07 12:15:00
David Song, Strategist
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Talking Points

  • Euro: Breaks Out Of Narrow Range, Germany Shows Greater ECB Support
  • British Pound: BoE Maintains Current Policy, U.K. To Create 140K Jobs

Euro: Breaks Out Of Narrow Range, Germany Shows Greater ECB Support

The Euro rallied to a fresh monthly high of 1.2716 as policy makers across Europe showed increased support for the European Central Bank’s unlimited bond-purchasing program, and we may see the EURUSD continue to gain ground in the week ahead as it breaks out of the range-bound price action carried over from the previous month. Indeed, German Finance Minister Wolfgang Schaeuble argued that the non-standard measure is ‘not the beginning of monetary financing of sovereign debt’ as the central bank continues to operate within its mandate, while European Council President Herman Van Rompuy warned that the current situation in Europe would have been ‘much more tense’ without the ECB.

In contrast, European Commission President Jose Manuel Barroso contended that the central bank should move away from monetary financing and not directly finance the governments operating under the monetary union, and the Governing Council may come under increased criticism as it puts its independence on the line to buy more time. As Governing Council member Luc Coene, who opposes the unlimited bond-purchasing program, states that the central bank may implement a rate cut in October, we may see the central bank continue to push back its unlimited bond-purchase program, but the ECB may have little choice but to implement a range of tools over the coming months as the region faces a deepening recession. Although the upward trending channel from the end of July continues to take shape, we’re keeping a close eye on the relative strength index as it approaches overbought territory, and we may see a short-term correction in the week ahead should the economic docket continue to reinforce a dour outlook for the region.

British Pound: Threatens Channel Resistance, Short-Term Correction Ahead

The British Pound struggled to maintain the overnight advance to 1.5984 despite the slew of positive developments coming out of the U.K., and the pullback in the GBPUSD may turn into a larger correction as the pair continues to threaten the upper bounds of the ascending channel from July. As growth and inflation in the U.K. continues to pick up, we should see the Bank of England endorse a neutral policy stance for the remainder of the year, and the meeting minutes may sound more upbeat this time around as the economy gets on firmer footing. However, as the RSI on the GBPUSD flirts with overbought territory, we may see the pair fall back towards for former resistance around the 1.5740-50 to test for interim support, and the near-term outlook for the Pound may turn increasingly bullish as the BoE slowly moves away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

14:00

10:00

Ivey Purchasing Managers Index s.a. (AUG)

58.0

62.8

GBP

14:00

10:00

NIESR Gross Domestic Product Estimate (AUG)

-0.2%

CAD

15:40

11:40

BoC Governor Mark Carney Speaks on Canadian Economy

CNY

1:30

21:30

Consumer Price Index (YoY) (AUG)

2.0%

1.8%

CNY

1:30

21:30

Producer Price Index (YoY) (AUG)

-3.2%

-2.9%

--- 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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