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Euro Weighed By Greek Fears- ECB May Fail To Solve Debt Crisis

Euro Weighed By Greek Fears- ECB May Fail To Solve Debt Crisis

2012-09-21 12:20:00
David Song, Strategist
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Talking Points

  • Euro: ECB May Fail To Solve Crisis, Troika To Return To Greece
  • British Pound: U.K. Deficit Hits Record, BoE Sees Recovery Next Quarter

Euro: ECB May Fail To Solve Crisis, Troika To Return To Greece

The Euro pared the overnight advance to 1.3046 as Greece persistently struggles to secure its next bailout payment, and the single currency may face additional headwinds over the near-term as the debt crisis continues to dampen the outlook for the region.

Indeed, the Troika – the European Union, European Central Bank and the International Monetary Fund – will return to Athens in a week as the EUR 11.6B austerity program remains under review, while there’s talk that Greece will introduce new taxes, which is expected to raise an additional EUR 2B in revenue.

Meanwhile, former Bundesbank President Axel Weber warned that the European Central Bank may not be able to solve the debt crisis as the non-standard measures only help to buy time, but the Governing Council may come under additional pressure to expand policy further as the governments operating under the single currency become increasingly reliant on monetary support.

As the euro-area faces a deepening recession, ECB President Mario Draghi may see scope to cut the benchmark interest rate further, and we may see the central bank carry its easing cycle into the following year as growth and inflation falter. In turn, we will maintain our bearish forecast for the EURUSD, and the pullback from 1.3170 looks poised to turn into a larger correction as the relative strength index continues to come off of overbought territory.

British Pound: U.K. Deficit Hits Record, BoE Sees Recovery Next Quarter

The British Pound rallied to a fresh monthly high of 1.6308 even as the U.K. saw a record GBP 14.4B budget deficit in August, and the sterling may continue to outperform against its major counterparts as the Bank of England softens its dovish tone for monetary policy.

Indeed, BoE board member Spencer Dale said the early signs from its Funding for Lending program are encouraging as the new initiative is expected to boost private sector credit, while Governor Mervyn King sees the recovery taking hold in the next quarter as the region appears to be coming out of the double-dip recession.

Although the GBPUSD looks poised for a near-term correction, we may see the pair continue to track higher as the relative strength index continues to sit in overbought territory, and we will need to see the oscillator fall back below the 70 figure to see a more meaningful pullback in the exchange rate.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

12:30

8:30

Wholesale Sales (MoM) (JUL)

0.0%

-0.1%

CAD

12:30

8:30

Consumer Price Index (MoM) (AUG)

0.3%

-0.1%

CAD

12:30

8:30

Consumer Price Index (YoY) (AUG)

1.3%

1.3%

CAD

12:30

8:30

Bank Canada Consumer Price Index Core (MoM) (AUG)

0.3%

-0.1%

CAD

12:30

8:30

Bank Canada Consumer Price Index Core (YoY) (AUG)

1.6%

1.7%

CAD

12:30

8:30

Consumer Price Index (AUG)

121.8

121.5

CAD

12:30

8:30

Consumer Price Index Core s.a. (MoM) (AUG)

0.2%

0.0%

--- 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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