Talking Points

  • U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony
  • Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20
  • British Pound: U.K. Inflation Slows, BoE Minutes In Focus

U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony

The greenback is firming up ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight decline to 10,093, and the Fed's semi-annual report should dictate price action for the remainder of the week as market participants weigh the prospects for future policy. Indeed, there's speculation that Chairman Ben Bernanke may hint at additional monetary easing amid the slowing recovery, but we may the central bank head endorse a wait-and-see approach as the FOMC expands 'Operation Twist.'

Although we expected Mr. Bernanke to keep all options on the table, there's certainly limited scope for the Fed to push through another large-scale asset purchase program as the central bank sees the economy on a more sustainable path. However, as consumer prices in the U.S. are expected to expand at the slowest pace since January 2011, easing price pressures may continue to fuel bets for more monetary stimulus, but we will be keeping a close eye on the core CPI as it continues to hold above the 2% target for inflation. As the USDOLLAR carves out a higher low in July, we should see the upward trend continue to take shape, and we are still looking for another run at the 10,300 figure as the Federal Reserve gradually moves away from its easing cycle.

Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20

The Euro climbed to a fresh weekly high of 1.2316 as Spain sold EUR 3.56B in bills, which exceeded the EUR 3.5B target, with the debt yielding 3.918%, which compares to the 5.074% offered in June. As European finance ministers are scheduled to discuss Spain's bailout package on July 20, the renewed efforts to tackle the debt crisis may continue to prop up the single currency, but the policy outlook continues to generate a bearish outlook for the EURUSD as the European Central Bank continues to embark on its easing cycle. As the fundamental outlook for the euro-area continues to deteriorate, the heightening risk for a prolonged recession may encourage the ECB to adopt a zero interest rate policy (ZIRP), but the Governing Council may have little choice but to implement a range of tools to address the risks surrounding the region as European policy makers struggle to stem the risk for contagion. As the relative strength index on the EURUSD continues to come off of oversold territory, the short-term rebound may produce a run at the 20-Day SMA (1.2426), but we continue to favor the downside as price action remains capped by the 50-Day SMA (1.2540).

British Pound: U.K. Inflation Slows, BoE Minutes In Focus

The British Pound failed to maintain the overnight advance to 1.5677 as the headline reading for U.K. inflation expanded at the slowest pace since November 2009, and the Bank of England Minutes on tap for tomorrow may produce additional downside pressures on the sterling should the central bank talk up speculation for more quantitative easing. Indeed, we're very interested to see the vote count as the Monetary Policy Committee expanded the Asset Purchase Facility to GBP 375B earlier this month, but the central bank's fundamental assessment should have the greatest impact on future price action as Governor Mervyn King aims to encourage a stronger recovery. As the BoE & U.K. Treasury take additional steps to shore up private sector credit, the new initiative should alleviate calls for more QE, and we may see the committee revert back to a wait-and-see approach as policy makers anticipate to see a stronger recovery in the second-half of the year. As the GBPUSD struggles to push back above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, we should see the GBPUSD maintain the broad range carried over from June, but the pair may weaken to the 50.0% Fib around 1.5270 should we see an overwhelming majority of the MPC support more easing.

--- Written by David Song, Currency Analyst

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