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Euro to Falter as ECB Pursues Easing Cycle- Cable Looks Higher

Euro to Falter as ECB Pursues Easing Cycle- Cable Looks Higher

David Song, Strategist
Forex_Euro_to_Falter_as_ECB_Pursues_Easing_Cycle-_Cable_Looks_Higher_body_ScreenShot298.png, Euro to Falter as ECB Pursues Easing Cycle- Cable Looks Higher

Talking Points

  • Euro: ECB’s Draghi Says Economic Situation Remains Challenging
  • British Pound: BoE Sees Recovery in U.K., Private Lending to Pickup
  • U.S. Dollar: Fed’s William Sees FOMC Tapering QE

Euro: ECB’s Draghi Says Economic Situation Remains Challenging

The Euro is giving back the overnight advance to 1.3042 even as the economic docket showed manufacturing in Europe contracting at a slower pace during the month of May, and the single currency may continue to track lower ahead of the European Central Bank (ECB) meeting as the Governing Council remains poised to carry its easing cycle into the second-half of the year.

Prior to the interest rate decision, ECB President Mario Draghi reiterated that the economic situation in the euro-area remains challenging as the region remain mired in recession, and warned that monetary policy cannot substitute for structural reforms as the EU scales back its push for austerity.

Although the ECB is widely expected to keep the benchmark interest rate at 0.50%, the central bank may show a greater willingness to implement additional rate cuts in order to shore up the ailing economy, while the Governing Council may come under increased pressure to introduce more non-standard measures as the governments operating under the single currency become increasingly reliant on monetary support.

Indeed, we may see a greater discussion to purchase Asset-Back Securities (ABS) as the Governing Council looks to encourage private-sector lending across the monetary union, but President Draghi may face increased scrutiny as the central bank pushes into uncharted territory.

As the EURUSD struggles to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we may see the pair continue to carve a lower top in June, and the ECB rate decision may serve as the fundamental catalyst to put the head-and-shoulders pattern into play as market participants weigh the outlook for monetary policy.

British Pound: BoE Sees Recovery in U.K., Private Lending to Pickup

The British Pound extended the rebound from the previous week, with the GBPUSD climbing to a high of 1.5287, and the sterling may continue to gain ground ahead of the Bank of England (BoE) interest rate decision as the central bank appears to be slowly moving away from its easing cycle.

Indeed, BoE Governor Mervyn King continued to note a recovery in the U.K., with Markets Director Paul Fisher anticipating a pickup in net lending throughout the course of the year, and we may see a growing number of Monetary Policy Committee officials adopt a hawkish tone for monetary policy as inflation is seen holding above the 2% target over the policy horizon.

In turn, we may see another 6-3 split within the MPC, but the central bank may refrain from releasing a policy statement once again as it remains on the sidelines. Nevertheless, as the interest rate outlook improves, the recent advance in the GBPUSD may produce another run at the 38.2% retracement from the 2009 low to high around 1.5680, and we may see the sterling outperform in the second-half of the year as market participants scale back bets for additional monetary support.

U.S. Dollar: Fed’s William Sees FOMC Tapering QE

The greenback continued to lose ground during the first trading day of June, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,725, and the reserve currency may weaken further during the North American trade as the ISM Manufacturing survey is expected to dampen the outlook for growth.

However, comments from San Francisco Fed President John Williams may increase the appeal of the USD as he sees the FOMC tapering its asset purchase program as ‘early as this summer,’ and we should see the bullish sentiment surrounding the greenback gather pace in the second-half of the year as a growing number of central bank officials scale back their willingness to expand the balance sheet further.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Construction Spending (MoM) (APR)

1.0%

-1.7%

USD

14:00

10:00

ISM Manufacturing (MAY)

50.5

50.7

USD

14:00

10:00

ISM Prices Paid (MAY)

49.5

50.0

USD

14:00

10:00

Revisions: Construction data back to Jan. 2011

EUR

16:00

12:00

Italian New Car Registrations (YoY) (MAY)

-10.83%

USD

21:00

17:00

Total Vehicle Sales (MAY)

15.10M

14.88M

USD

21:00

17:00

Domestic Vehicle Sales (MAY)

12.00M

11.76M

GBP

23:01

19:01

BRC Sales Like-For-Like (YoY) (MAY)

1.3%

-2.2%

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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