EUR Tumbles As Greece Fails To Form Government, GBP To Resume Rally

Talking Points

• Euro: Greece Fails To Form Government, ECB Conference In Focus
• British Pound: BoE To Preserve Easing Cycle, Lower Growth Forecast
• U.S. Dollar: FOMC To Sound More Hawkish On Sticky Inflation, Faster Growth

Euro: Greece Fails To Form Government, ECB Conference In Focus

The Euro pared the overnightadvance to 1.2868 as Greece fails to form a coalition government, and the single currency should continue to give back the advance from earlier this year as the fundamental outlook for the region turns increasingly bleak. As European policy makers struggle to meet on common ground, the risks surrounding the new election mixed with fears of a Greek exit continues to cast a bearish outlook for the single currency, and we may see the European Central Bank try to talk up market sentiment as the group is scheduled to hold its monetary policy conference on Wednesday at 13:00 GMT.

As the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support, the ECB may show a greater willingness to carry its easing cycle into the second-half of the year, and we may see the central bank target the benchmark interest rate as its non-standard measures have a limited impact in stemming the risk for contagion. As the recent decline in the EURUSD remains oversold, the pair looks poised for a short-term correction, but we should see the pair track lower until the relative strength index climbs back above 30. In turn, we should see the euro-dollar continue to retrace the advance from earlier this year, and we are still looking for a test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the region turns increasingly bleak.

British Pound: BoE To Preserve Easing Cycle, Lower Growth Forecast

The British Pound slipped to a fresh monthly low of 1.6018 as market participants scaled back their appetite for risk, and we may see the GBPUSD threaten the upward trend from earlier this year as market participants see the Bank of England carrying its easing cycle into the second-half of the year. As the U.K. faces a double-dip recession, there's speculation that the BoE will curb its growth forecast and leave the door open to expand its balance sheet further, but the central bank may sound a bit more hawkish this time around amid the stickiness in underlying inflation. In turn, we may see a growing rift in within the Monetary Policy Committee, but we anticipate to see the group move away from its easing cycle as its credibility for price stability remains under scrutiny. In turn, we will maintain out bullish call for the GBPUSD, and we should see the short-term correction taper off going into the middle of the week as the pair comes up against former resistance around 1.6000, which should act as new support.

U.S. Dollar: FOMC To Sound More Hawkish On Sticky Inflation, Faster Growth

The greenback extended the rally from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a fresh monthly high of 10,070, and the reserve currency may track higher throughout the North American trade as the flight to safety picks up. Indeed, the developments coming out of the world's largest economy continues to instill a bullish outlook for the dollar as it dampens the prospects for another large-scale asset purchase program. In turn, the FOMC meeting minutes on tap for Wednesday may highlight an improved outlook for the U.S., and a less dovish statement should increase the appeal of the reserve currency as market participants raise bets for a rate hike.

--- Written by David Song, Currency Analyst