Talking Points

  • Euro: EU To Discuss Growth Pact, Short-Term Relief For Spain and Italy
  • British Pound: BoE Warns Of Tightening Credit Conditions, Raising Bets For More QE
  • U.S. Dollar: Core PCE Remains Sticky, Limiting Scope For QE3

Euro: EU To Discuss Growth Pact, Short-Term Relief For Spain and Italy

The Euro tumbled to a fresh weekly low of 1.2406 as the weakening labor market in Germany paired with lower confidence across monetary union raised the threat for a prolonged recession, and the single currency may face additional headwinds going into the end of the week should the developments coming out of the EU Summit fail to restore investor confidence. It seems as though the group is easing its push for Euro bonds as policy makers pledge to nail out a potential growth package to combat the slowing recovery, while EU Economic and Monetary Affairs Commissioner Ollie Rehn plans to discuss a short-term relief program for Spain and Italy as heightening finance costs across the periphery countries raises the risk for contagion.

Should the group struggle to meet on common ground, headlines coming out of the meeting may continue to drag on risk-taking behavior, and we may see the EURUSD give back the rebound from 1.2287 as the fundamental outlook for the region turns increasingly bleak. As the EURUSD carves out a lower top in June, we should see the downward trend carried over from 2011 continue to take shape in the month ahead, and the pair may mark fresh yearly lows in July as market participants see the European Central Bank expanding monetary policy further in the second-half of the year. According to a survey by Bloomberg News, 16 of the 24 economists polled are looking for at least a 25bp rate cut next week, and dovish comments coming out of the Governing Council could trigger a sharp selloff in the exchange rate as investors see scope for the ECB to adopt a zero interest rate policy later this year.

British Pound: BoE Warns Of Tightening Credit Conditions, Raising Bets For More QE

The British Pound slipped to a low of 1.5508 as the ongoing turmoil in the Euro Zone - the U.K.'s largest trading partner - dragged on market sentiment, and the sterling may fade additional headwinds over the near-term as market participants continue to raise bets for more quantitative easing. Indeed, the Bank of England warned of tightening credit conditions for the third-quarter as 'elevated cost of bank funding is passed through to borrowers,' and we may see the Monetary Policy Committee continue to lean towards additional asset purchases in an effort to stem the downside risks surrounding the region. As the GBPUSD fails to hold above the 10-Day SMA (1.5625), we may see the pair make another run at the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270, but we may see an ongoing rift within the MPC as the stickiness in underlying price growth raises the threat for inflation.

U.S. Dollar: Core PCE Remains Sticky, Limiting Scope For QE3

The greenback is tracking higher during the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) quickly reversing the overnight decline to 10,121, and the reserve currency may appreciate further over the remainder of the week as the flight to safety gathers pace. Nevertheless, the final 1Q GDP report for the world's largest economy reinforces our bullish outlook for the dollar as the Core Personal Consumption Expenditure index - the Fed's gauge for inflation - rose at the fastest pace since 2Q 2011, and the stickiness in underlying price growth continues to limit the Fed's scope to push through another large-scale asset purchase program as it raises the risk for inflation. In turn, we should see the FOMC move away from its easing cycle, and the central bank may look to shift gears towards the end of the year as growth and inflation gradually gathers pace.

--- Written by David Song, Currency Analyst

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

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