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Talking Points
- U.S. Dollar: Inflation Accelerates, NAHB Housing Index On Tap
- Euro: EU Struggle To Meet On Common Ground, Will Meet On June 19-20
- British Pound: Threatening The Rebound From May Ahead Of BoE Minutes
The U.S. dollar regained its footing on Tuesday following a shift in risk-taking behavior and the greenback may gain ground throughout the North American trade as heightening price pressures raises the prospects for rate hike in the world's largest economy. Indeed, the faster rate of inflation could ultimately lead the Fed to start normalizing monetary policy later this year, and Chairman Ben Bernanke may soften his dovish tone for monetary policy as price growth continues to move away from the 2% target.
As the FOMC maintains it dual mandate to ensure price stability and foster full employment, heightening risk for inflation may lead the committee to abandon its zero interest rate policy, and interest rate expectations may gather pace in the second-half of the year as the central bank expects to see a more robust recovery in the coming months. In turn, the committee may lay out a tentative exit strategy at the next policy meeting on June 22, and the statement accompanying the rate decision could highlight an increased willingness to withdraw monetary stimulus from the economy in order to balance the risks for the nation. Accordingly, the rebound in the Dow Jones-FXCM U.S. dollar index may gather pace going into the end of the week, and the gauge should make another run at 9800.00 as it pares the decline from the previous month.
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The EUR/USD tumbled to a fresh monthly low of 1.4263 as the heightening risk for the Greek default weighed on trader sentiment, and the single-currency is likely to face additional headwinds in the days ahead as European policy makers struggle to contain the sovereign debt crisis. After holding an emergency meeting earlier this week, the EU said Greece will get the second payment of the EUR 110 bailout in July as the group of finance ministers failed to meet on common, and the committee went onto say that additional measures could be taken at the conference on June 19 to 20 as the risk for contagion intensifies. In turn, the European Central Bank may have little choice but to delay its exit strategy further, and the Governing Council may soften their hawkish outlook for monetary policy as the debt crisis weighs on the economic outlook. As a result, the reversal from 1.4496 may gather pace going into the end of the week, and the EUR/USD may work its way back to 1.4000 should it fail to find near-term support at the 100-Day moving average at 1.4148.
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The British Pound slipped to 1.6226 during the overnight trade following the larger-than-expected rise in U.K. jobless claims, and the sterling may continue to threaten the rebound from May (1.6061) as we are likely to see the Bank of England maintain a cautious outlook for the region. In light of the recent developments coming out of Britain, the BoE meeting minutes due out on June 22 could highlight a dovish outlook for future policy, and the central bank may show an increased willingness to support the real economy throughout 2011 as it aims to balance the risks for the region. If we see BoE Governor Mervyn King talk down speculation for higher interest rates, the near-term decline in the GBP/USD should gather pace over the near-term, and the exchange rate may fall back all the way to former resistance around 1.6000 to test for support.
