Talking Points

  • Euro: ECB No Longer Oppose Bondholder Loss, Germany Delays ESM Ruling
  • British Pound: U.K. To Show Zero Growth In 2012, Outlook Hinges On BoE Minutes
  • U.S. Dollar: Retail Sales Contracts For Third Month, Fed Chairman Bernanke In Focus

Euro: ECB No Longer Oppose Bondholder Loss, Germany Delays ESM Ruling

The Euro slipped to an overnight low of 1.2179 amid rumors that the European Central Bank would no longer oppose losses for senior bondholders of euro-area banks, while Germany's highest court announced it would delay its ruling on the European Stability Mechanism by an additional eight weeks. In response, the European Commission argued that 'the draft memorandum doesn't foresee participation of senior creditors,' while the group pledged to nail out Spain's bailout package in the coming days amid the heightening threat for contagion.

As European policy makers maintain a reactionary approach in addressing the debt crisis, there is likely to be increased pressure on the ECB to shore up the ailing economy, and it seems as though the Governing Council will continue to embark on its easing cycle in the second-half of the year in an effort to stem the risk for a prolonged recession. According to Credit Suisse overnight index swaps, market participants are still pricing an 83% chance for a 25bp at the August 2 meeting, and central bank President Mario Draghi may continue to cast a cautious outlook for the region as growth and inflation falters. However, as the relative strength index on the EURUSD continues to hold above oversold territory, the lack of momentum to push below 30 could bring about a short-term correction, and we will be looking to sell rallies in the euro-dollar as the downward trend carried over from the previous year continues to take shape.

British Pound: U.K. To Show Zero Growth In 2012, Outlook Hinges On BoE Minutes

The British Pound gave back the rebound from Friday to maintain the previous week's range, and the sterling should continue to track sideways ahead of the Bank of England Minutes as market participants weigh the outlook for monetary policy. Meanwhile, Ernst & Young Item Club warned that the U.K. may face a protracted economic downturn as the group cut its 2012 GDP forecast to zero from 0.4%, and the central bank may keep the door open to expand monetary policy further in order to encourage a sustainable recovery. However, as the stickiness in underlying price growth raises the threat for inflation, we may see a broad range of views within the Monetary Policy Committee, and Governor Mervyn King may struggle to maintain a majority as members of the MPC soften their dovish tone for monetary policy. In turn, we should see the GBPUSD preserve the range-bound price action during the first-half of the week, and a less dovish statement may spur another run at the 100-Day SMA (1.5795) as market participants scale back bets for additional monetary easing.

U.S. Dollar: Retail Sales Contracts For Third Month, Fed Chairman Bernanke In Focus

The greenback is losing ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,130, and the reserve currency may continue to retrace the rebound from earlier this month as the fundamental outlook for the world's largest economy turns increasingly bleak. Indeed, U.S. retail sales unexpectedly contracted for the third month in June amid the slowing recovery, and the dismal print appears to be fueling speculation for additional monetary support as private sector consumption remains one of the leading drivers of growth. As Fed Chairman Ben Bernanke is scheduled to testify in front of Congress this week, the fresh batch of central bank rhetoric is likely to heavily influence the dollar, and we may see the central bank head keep the door open to expand the balance sheet further in an effort to encourage a stronger recovery.

--- Written by David Song, Currency Analyst

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