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Euro Capped Ahead of ECB- Bearish Formation Remains in Focus

Euro Capped Ahead of ECB- Bearish Formation Remains in Focus

David Song, Strategist
Forex_Euro_Capped_Ahead_of_ECB-_Bearish_Formation_Remains_in_Focus_body_ScreenShot007.png, Euro Capped Ahead of ECB- Bearish Formation Remains in Focus

Talking Points

  • Euro: Producer Prices Disappoint, ESM in ‘Final Talks’
  • British Pound: BoE Governor King Sees ‘Gentle Recovery’
  • U.S. Dollar: Fed’s Esther George in Focus Amid Light Calendar

Euro: Producer Prices Disappoint, ESM in ‘Final Talks’

The Euro advanced to 1.3096 even as Producer Prices in the monetary union contracted an annualized 0.2% in April to mark the first decline since February 2010, but the short-term rebound in the single currency appears to be tapering off ahead of the European Central Bank (ECB) interest rate decision amid the weakening outlook for the region.

Indeed, Klaus Regling, who heads the European Stability Mechanism, said the organization is in ‘final talks’ to directly aid commercial banks across the monetary union, but we may see the EU maintain a reactionary approach in addressing the risks surrounding the region as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

Although the ECB is widely expected to carry its easing cycle into the second-half of the year, there’s reports that the central bank will refrain from purchasing Asset-Backed Securities (ABS) as it will have a limited impact in encouraging private sector lending, and we may see the Governing Council continue to target the benchmark interest rate as the ailing economy struggles to return to growth.

As the prolonged recession threatens the outlook for price stability, we may see a greater discussion to implement a negative-interest rate policy (NIRP) at the June 6 meeting, and we may see a growing number of ECB officials push for additional monetary support in the second-half of the year as the periphery countries struggle to get their house in order.

As the EURUSD continues to carve a lower top below 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, and we may see the pair another run at the 23.6% retracement (1.2640-50) in the coming days should ECB President Mario Draghi show a greater willingness to push the benchmark interest rate to a fresh-record low in the coming months.

British Pound: BoE Governor King Sees ‘Gentle Recovery’

The British Pound pared the advance from earlier this week, with the GBPUSD tagging an overnight low of 1.5281, but the sterling remains poised to regain its footing ahead of the Bank of England (BoE) interest rate decision as the central bank drops its dovish tone for monetary policy.

Indeed, BoE Governor Mervyn King struck an improved outlook for the U.K. as he sees a ‘gentlerecovery’ underway, and went onto say that the Monetary Policy Committee ‘has already done a great deal to stimulate economic activity’ as the central bank extends the Funding for Lending Scheme by another 12-months.

As the BoE appears to be slowly moving away from its easing cycle, we should see the GBPUSD continue to retrace the decline from earlier this year, and the pair looks poised to carve out a higher high as it builds a short-term base above the 1.5000 handle.

U.S. Dollar: Fed’s Esther George in Focus amid Light Calendar

The greenback bounced back on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 10,720, and we may see the reserve currency appreciate further during the North American trade should Kansas City Fed President Esther George, the lone dissenter on the FOMC, lay out a more detailed exit strategy.

Although the economic docket remains fairly light for the remainder of the day, the fresh batch of central bank rhetoric may increase the appeal of the USD as we see a growing number of Fed officials adopt an improved outlook for the world’s largest economy, and the bullish sentiment surrounding the greenback should gather pace in the second-half of the year as the FOMC looks scale back on quantitative easing.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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