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Euro Traders Eye OMT Hearing- S&P Upgrades U.S. Outlook

Euro Traders Eye OMT Hearing- S&P Upgrades U.S. Outlook

David Song, Strategist
Forex_Euro_Traders_Eye_OMT_Hearing-_SP_Upgrades_U.S._Outlook_body_ScreenShot029.jpg, Euro Traders Eye OMT Hearing- S&P Upgrades U.S. Outlook

Talking Points

  • Euro: ECB Sees ‘Modest’ Recovery, OMT Hearing in Focus
  • British Pound: Capped by 38.2% Fib, Larger Correction in Sight
  • U.S. Dollar: S&P Upgrades Outlook, Fed’s Bullard on Tap

Euro: ECB Sees ‘Modest’ Recovery, OMT Hearing in Focus

The Euro advanced to an overnight high of 1.3229 as European Central Bank (ECB) officials continue to see a ‘modest’ recovery later this year, but we may see the Governing Council further embark on its easing cycle in the coming months should the region struggle to emerge from the recession.

As Germany's Federal Constitutional Court prepares for a two-day hearing on the Outright Monetary Transactions, ECB board member Joerg Asmussen warned that repealing the non-standard measure ‘would have serious consequences’ for the union, and we may see the central bank face increased scrutiny over the near to medium-term as the governments operating under the single currency become increasingly reliant on monetary support.

In turn, Governing Council Benoit Coeure said the central bank will ‘consider all options’ to further assist the ailing economy as the fundamental outlook for the region remains clouded with high uncertainty, and pledged to support the region ‘as long as needed’ as the economic downturn continue to threaten price stability.

As the periphery countries face a deepening recession, we should see the ECB retain a dovish tone for monetary policy in the second-half of the year, and a growing number of central bank officials may show a greater willingness to implement a negative interest rate policy (NIRP) in order to address the risks surrounding the region.

Although the head-and-shoulders pattern in the EURUSD no longer looks valid, the ongoing turmoil in Europe should produce further declines in the exchange rate, and pair may have put in a near-term top around the 1.3300 handle as the relative strength index approaches overbought territory. Nevertheless, as the German court hearing comes into focus, negative headlines surrounding the OMT program may rattle the single currency, and we may see the euro-dollar struggle to preserve the rebound carried over from the previous month should the fundamental outlook for the region turn increasingly bleak.

British Pound: Capped by 38.2% Fib, Larger Correction in Sight

The British Pound regained its footing on Monday, with the GBPUSD climbing to a high of 1.5561, and the sterling may continue to retrace the decline from earlier this year as the Bank of England (BoE) appears to be moving away from its easing cycle.

Althoughthe economic docket is expected to show Industrial Production holding flat in April, another 5.0K drop in U.K. Jobless Claims may increase the appeal of the sterling, and we may see a growing number of BoE officials strike an improved outlook for the region as the region skirts a triple-dip recession. In turn, we may see the British Pound outperform on a longer-term scale, but the technical outlook highlights the risk of seeing a more meaningful correction in the GBPUSD as the pair comes off of the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680.

As the relative strength index on the GBPUSD turns over ahead of overbought territory, we may see a larger pullback ahead of the U.K. data on tap for later this week, but we will look for more British Pound strength over the near to medium-term as the BoE looks poised to keep its asset purchase program capped at GBP 375B.

U.S. Dollar: S&P Upgrades Outlook, Fed’s Bullard on Tap

The greenback is struggling to hold its ground, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the advance to 10,687, but the reserve currency may track higher during the North American trade as Standard & Poor’s updates its outlook for the U.S. to ‘stable’ from ‘negative.’

Nevertheless, as St. Louis Fed President James Bullard is scheduled to speak later today, the central bank official may highlight a greater willingness to scale back on quantitative easing, and the FOMC looks poised to switch gears in the second-half of the year as the world’s largest economy gets on a more sustainable path. In turn, we should see the bullish sentiment surrounding the greenback continue to take shape in the second-half of the year, and will continue to buy dips in the reserve currency as the fundamental outlook improves.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:50

9:50

Fed's James Bullard to Speaks on Global Economy

USD

18:00

14:00

Dallas Fed Holds Conference on Global Economy

CHF

19:00

15:00

SNB's Jean-Pierre Danthine Speaks on Swiss Economy

GBP

23:01

19:01

RICS House Price Balance (MAY)

3%

1%

--- 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, please follow this link.

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