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Euro Dragged By Spanish Woes, Sterling At Risk Amid Slowing Inflation

Euro Dragged By Spanish Woes, Sterling At Risk Amid Slowing Inflation

David Song, Strategist

Talking Points

  • Euro: Spain Deposits Slump EUR 26B, Struggles To Hold 23.6% Fib
  • British Pound: Bucks Trend, U.K. Price Growth To Slow In August
  • U.S. Dollar: Empire Manufacturing Disappoints, Fed Hawks In Focus

Euro: Spain Deposits Slump EUR 26B, Struggles To Hold 38.2% Fib

The Euro slipped to 1.3082 as a report by the Bank of Spain showed households and businesses withdrew EUR 26B in deposits during July, and the ongoing turmoil in the banking system may continue to drag on the exchange rate it raises the threat for a bailout.

Meanwhile, German Chancellor Angela Merkel continued to voice her support for the European Central Bank’s bond purchase program, stating that the non-standard measure will help to stabilize the single currency, but warned of ‘fiscal actions by the ECB’as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support. As the Governing Council continues to push into uncharted territory, we may see ECB President Mario Draghi come under criticism, and the central bank may have little choice but to carry out its easing cycle throughout the remainder of the year as the European periphery struggle to get their house in order.

As the EURUSD struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120-30, the pullback from 1.3139 may turn into a larger correction, but we will be keeping a close eye on the relative strength index as it continues to sit in overbought territory. We should see a more meaningful move to the downside once the oscillator pushes back below 70, and we may see the pair fall back towards the 23.6% Fib around 1.2640-50 to test for near-term support.

British Pound: Bucks Trend, U.K. Price Growth To Slow In August

The British Pound bucked the trend as the GBPUSD pushed to a high of 1.6243, but the sterling may come under pressure over the next 24-hours of trading as the economic docket is expected to show a weakening outlook for the U.K.

As the consumer price report is anticipated to show the headline reading for inflation slowing in August, the risk of undershooting the 2% target may halt the rally carried over from July, and we may see the pound-dollar may consolidate going into the Bank of England Minutes as the central bank maintains a cautious outlook for the region. Although the RSI on the GBPUSD continues to show an overbought signal, we need to see the oscillator push back below 70 for a correction to take shape, but the sterling may continue to outperform against its major counterparts as the BoE appears to be slowly moving away from its easing cycle.

U.S. Dollar: Empire Manufacturing Disappoints, Fed Hawks In Focus

The greenback bounced back on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to 9,795, and the reserve currency may continue to retrace the sharp decline from the previous week as risk sentiment falters.

However, we saw the Empire Manufacturing index slip to -10.41 in September amid forecasts for a -2.00 print, and the slowing recovery may continue to dampen the appeal of the greenback as the Federal Reserve keeps the door open to expand its balance sheet further.

Nevertheless, as Fed hawks are scheduled to speak through the week, we are likely to see mixed views surrounding the new QE program, and we may see a growing rift within the board as central bank officials see a limited risk for a double-dip recession.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

13:00

9:00

Existing Home Sales (MoM) (AUG)

0.0%

EUR

16:00

12:00

ECB's Luc Coene Speaks on Euro 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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