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Bearish Euro Formation Remains Intact- EU Summit to Disappoint

Bearish Euro Formation Remains Intact- EU Summit to Disappoint

David Song, Strategist

Talking Points

  • Euro: Bundesbank Raises 2Q Outlook, EU Meeting in Focus
  • British Pound: U.K. CPI Disappoints, BoE Minutes to Show 6-3 Split
  • U.S. Dollar: Fed’s Bullard, Dudley on Tap- Bernanke to Testify

Euro: Bundesbank Raises 2Q Outlook, EU Meeting in Focus

The Euro slipped to an overnight low of 1.2840 even as the Bundesbank raised its fundamental outlook for Europe’s largest economy and expects a marked pickup in growth during three-months through June, and the single currency may face additional headwinds over the next 24-hours of trading should European policy makers fail to restore investor confidence.

Indeed, the EU meeting in Brussels may disappoint as the governments operating under the monetary union struggle to meet on common ground, and the group may merely make another attempt to buy more time as they become increasingly reliant on monetary support. As the region remains mired in recession, the periphery countries may continue to scale back their push for austerity, and we should see the European Central Bank (ECB) continue to embark on its easing cycle as the economic downturn threatens price stability.

Indeed, the ECB may look to purchase Asset-Backed Securities (ABS) in an effort to steer the region out of recession, but a growing number of Governing Council officials may favor a negative-interest rate policy (NIRP) for the euro-area as the central bank continues to operate under its one and only mandate to ensure price stability.

As the policy outlook continues to highlight more ECB easing in the coming month, we should see the head-and-shoulders pattern in the EURUSD play out going into the second-half of the year, and we are still looking for a run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the pair searches for support.

British Pound: U.K. CPI Disappoints, BoE Minutes to Show 6-3 Split

The British Pound tumbled to a fresh monthly low of 1.5137 as the headline reading for U.K. inflation increased an annualized 2.4% in April amid forecasts for a 2.6% print, while core consumer prices climbed 2.0% during the same period to mark the slowest pace of growth since November 2009.

Indeed, easing price pressures may keep the Bank of England (BoE) on the sidelines as it aims to encourage a stronger recovery, but we may see a growing number of central bank officials adopt a more hawkish tone for monetary policy as U.K. officials see a ‘modest’ recovery in the region.

Although the BoE Minutes is widely expected to show another 6-3 split within the Monetary Policy Committee, the policy statement may highlight a greater willingness to normalize monetary policy, and we may see the central bank start to discuss a tentative exit strategy in the second-half of the year as the region is expected to face above-target inflation over the policy horizon.

In turn, we may see the GBPUSD continue to carve out a higher low during the final days of May, and the sterling may continue to retrace the decline from earlier this year amid the shift in the policy outlook.

U.S. Dollar: Fed’s Bullard, Dudley on Tap- Bernanke to Testify

The greenback regained its footing ahead of the FOMC Minutes, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to a high of 10,805, and the reserve currency may continue to track higher over the next 24-hours of trading should we see a growing number of central bank officials show a greater willingness to scale back on quantitative easing.

As St. Louis Fed President James Bullard and New York Fed President William Dudley take note of the more robust recovery in the world’s largest economy, the fresh batch of central bank rhetoric may increase the appeal of the USD, and we may see Fed Chairman Ben Bernanke show a greater willingness to taper the asset-purchase program while testifying in front of Congress as the region gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:30

11:30

Fed's James Bullard Speaks on Monetary Policy

USD

16:30

12:30

BoC Governor Mark Carney Speaks on Canadian Economy

USD

17:00

13:00

Fed's William Dudley Speaks on Monetary Policy

--- 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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