Talking Points

  • Euro: ECB Sees Risk Of Greek Exit, June Forecast To Highlight Prolonged Recession
  • British Pound: BoE To Stay On Hold Through 2013 As Inflation Report Comes Into Focus
  • U.S. Dollar: China Cuts RRR By 50bp Ahead Of FOMC Minutes

Euro: ECB Sees Risk Of Greek Exit, June Forecast To Highlight Prolonged Recession

The Euro slipped to a fresh monthly low of 1.2829 as Spain sold EUR 2.9B in bills versus the EUR 3.0B target, while the yield tied to the region's 10-Year debt advanced to 6.33% from 6.22% following the auction. Beyond the heightening risk for contagion, policy makers in Greece are certainly running out of time as they struggle to form a coalition, and the threat of a Greek exit certainly raises the risk for a major selloff as the fundamental outlook for the region turns increasingly bleak.

Meanwhile, European Central Bank board member Luc Coene said Greece leaving the monetary union 'would be possible' according to an interview with the Financial Times, and went onto say that the revised economic forecast scheduled for June may highlighta 'slight deterioration in growth' as the region continues to face a risk for a prolonged recession. However, Mr. Coene talked down speculation for additional asset purchases as the non-standard measures have a limited impact in addressing the debt crisis, and it seems as though the Governing Council is looking to target the benchmark interest rate as its ballooning balance sheet comes under scrutiny. As the EURUSD continues to give back the advance from earlier this year, we should see the pair fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, but we will keep a close eye on the relative strength index as it slips into oversold territory.

British Pound: BoE To Stay On Hold Through 2013 As Inflation Report Comes Into Focus

The British Pound pared the overnight decline to 1.6050 as ongoing turmoil in Europe increased the appeal of the sterling, and the GBPUSD may track higher in the coming days should the Bank of England highlight an improved outlook for the U.K. As the BoE's quarter inflation report comes into focus, there's speculation that Governor Mervyn King will keep the benchmark interest rate on hold until late next year, but the central bank head may sound increasingly hawkish this time around as the stickiness in underlying price growth raises the risk for inflation. As the Monetary Policy Committee anticipates to see a more robust recovery in the second-half of 2012, we may see the board start to discuss a tentative exit strategy, and we should see the fresh highs in the GBPUSD as it maintains the upward trend from earlier this year. However, as the short-term correction continues to play out, we are still looking for a test of former resistance around 1.6000 for support, and we may see the pound-dollar continue to consolidate ahead of the BoE inflation report as market participants weigh the outlook for monetary policy.

U.S. Dollar: China Cuts RRR By 50bp Ahead Of FOMC Minutes

The greenback continued to gain ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,049, and the reserve currency may appreciate further over the next 24-hours of trading as the flight to safety gathers pace. Indeed, the People's Bank of China's announcement to cut the reserve requirement ratio by 50bp is having a limited impact on the market as the sovereign debt crisis continues to drag on investor confidence, and we should see risk sentiment continue to dictate price action across the major currencies as the economic docket remains fairly light for the North American session. However, as the Fed's policy meeting minutes highlight the biggest event risk for this week, we may see the dollar consolidate going into the middle of the week, but the fresh batch of central bank rhetoric may continue to instill a bullish outlook for the greenback should the Fed drop its dovish tone for monetary policy. As the economic recovery gathers pace, we may see the FOMC may hold an improved outlook for the second-half of the year, but we may see a growing rift within the committee as Fed Chairman Ben Bernanke keeps the door open to expand monetary policy further.

--- Written by David Song, Currency Analyst

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

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