Talking Points

  • Euro: Spanish Yields Approach 6%, Banks May Need More Capital
  • British Pound: Continues To Build Base Around 1.5800 Ahead Of Key Event Risks

Euro:Spanish Yields Approach 6%, Banks May Need More Capital

The Euro slipped to an overnight low of 1.3058 as heightening finance costs across the periphery countries raised the threat for contagion, and the single currency is likely to face additional headwinds over the near-term as the region continues to face a risk for a prolonged recession. Indeed, Bank of Spain Governor Miguel Angel Fernandez Ordonez warned commercial banks may require more capital if the 'economy worsened more than expected,' and went onto say that the region is likely to face a protracted recovery as the government sees the growth rate contracting 1.7% in 2012.

As the European Central Bank's Long Term Refinancing Operations appear to be having a limited impact in addressing the debt crisis, President Mario Draghi may look to target the benchmark interest rate, and the Governing Council may have little choice but to carry out its easing cycle throughout the year as the governments operating under the single currency become increasingly reliant on monetary support. As the fundamental outlook for the euro-area deteriorates, we maintain our bearish outlook for the EURUSD, but the pair may continue to track sideways over the remainder of the week as it appears to be building a short-term base around 1.3000. However, the lack of momentum to push back above the 100-Day SMA (1.3145) certainly raises the risk for a bearish breakdown in the exchange rate, and we may see the pair continue to threaten interim support around 1.3000 as European policy makers struggle to shore up investor confidence.

British Pound: Continues To Build Base Around 1.5800 Ahead Of Key Event Risks

The British Pound pared the overnight decline to 1.5808 to maintain the range from earlier this month, and the GBPUSD may track higher over the remainder of the week as the upward trending channel from earlier this year continues to take shape. As the pound-dollar carves out a higher low around 1.5800, we expect to see a fresh yearly high over the coming days, but we may see the sterling struggle to hold its ground over the next 24-hours of trading as the economic docket is expected to reinforce a weakened outlook for the U.K. In turn, we may see the GBPUSD track sideways going into the middle of the week, but we will maintain our bullish call for the pound-dollar as the pair continues to mark higher highs paired with higher lows.

More to Follow...

--- Written by David Song, Currency Analyst

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