Talking Points

  • Euro: Italy Ends Deadlock- Bundesbank Warns Against OMT
  • British Pound: BoE Sounds More Upbeat, Bullish Trend Remains Intact
  • U.S. Dollar: Personal Spending Remains Resilient, Pending Home Sales on Tap

Euro: Italy Ends Deadlock- Bundesbank Warns Against OMT

The Euro advanced to 1.3115 as Italy swore in Prime Minister Enrico Letta to end the nine week deadlock, but the deepening recession may undermine the new government’s ability to implement further reforms as the periphery countries become increasingly reliant on monetary support.

As economic confidence in the euro-area deteriorates, we’re seeing a growing number of European officials scale back their push for austerity, but the European Central Bank (ECB) may have limited room to further support the monetary union as its non-standard measures come under increased scrutiny. Indeed, the Bundesbank spoke out against the Outright Monetary Transactions (OMT)program and said that ‘it is not the duty of the ECB to rescue states in crisis,’ and went onto say that the Governing Council cannot uphold the ‘current composition of monetary union’ as it operates under its one and only mandate to ensure price stability.

As growth and inflation in the euro-area deteriorates, there’s growing speculation that the ECB will push the benchmark interest rate to a fresh record-low at the May 2 meeting, and we may see the central bank embark on its easing cycle throughout 2013 as the region remains mired in recession.

As the EURUSD makes another failed attempt to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we should see the head-and-shoulders formation continue to take shape ahead of the central bank meeting, and the single currency remains poised to face additional headwinds over the near to medium-term as European policy makers retain a reactionary approach in addressing the risks surrounding the region.

British Pound: BoE Sounds More Upbeat, Bullish Trend Remains Intact

The British Pound advanced to a fresh monthly high of 1.5545 and the sterling may continue to recoup the losses from earlier this year as the Bank of England (BoE) appears to be slowly moving away from its easing cycle.

BoE board member Andrew Bailey sounded rather upbeat and said there is ‘a very bigincentive in there to lend to small firms’ after the central bank revamped the Funding for Lending Scheme, while Monetary Policy Committee member Ian McCafferty said the U.K. economy is in a better position than the data suggests as the economic recovery slowly gathers pace.

As the BoE drops its dovish tone for monetary policy, it seems as though the central bank will stick to the sidelines throughout the remainder of the year, and we may see the MPC start to discuss a tentative exit strategy later this year as the U.K. is expected to face above-target inflation over the policy horizon.

Although the GBPUSD maintains the upward trending channel from earlier this year, the pair may face a small correction as it comes up against trendline resistance, but we will look to buy dips in the pound-dollar as the shift in the policy outlook increases the appeal of the sterling.

U.S. Dollar: Personal Spending Remains Resilient, Pending Home Sales on Tap

The greenback extended the decline from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tagging a low of 10,448, but we’re seeing the reserve currency regain its footing as the economic docket instills an improve outlook for growth.

Although U.S. Personal Income increased 0.2% in March versus forecasts for a 0.4% print, the resilience in Personal Spending may encourage the FOMC to retain its wait-and-see approach throughout the first-half of the year, but we may see a growing number of Fed officials scale back their willingness to expand the balance sheet further as the world’s largest economy gets on a more sustainable path. In turn, we may see the dollar track higher going into the FOMC interest rate decision on tap for later this week, and the fresh batch of central bank rhetoric may heighten the bullish sentiment surrounding the dollar should Fed Chairman Ben Bernanke adopt a more neutral to hawkish tone for monetary policy.

FX Upcoming










Pending Home Sales (MoM) (MAR)






Pending Home Sales (YoY) (MAR)





Dallas Fed Manufacturing Activity (APR)





Building Permits (MoM) (MAR)






GfK Consumer Confidence Survey (APR)



--- Written by David Song, Currency Analyst

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