Talking Points

  • Euro: EU Extends Deadline For Spain, ECB's Draghi Strikes Dovish Tone
  • British Pound: U.K. Takes Further Steps To Balance Budget, Consolidation Ahead
  • U.S. Dollar: Struggles Ahead Of North American Trade, Fed's Williams On Tap

Euro: EU Extends Deadline For Spain, ECB's Draghi Strikes Dovish Tone

The Euro climbed to an overnight high of 1.2315 amid hopes surrounding the EU meeting in Brussels, but we may see the group of finance ministers struggle to meet on common ground as the governments operating under the fixed-exchange rate system continue to move in their own interest. Indeed, the EU continued to float the idea of extending the deadline for Spain to meet its budget target, while the European Commission announced that 'there will be no need for a sovereign guarantee for banks being directly recapitalized by the ESM' as the group makes a greater push for fiscal integration.

Meanwhile, European Central Bank President Mario Draghi continued to strike a dovish tone for monetary policy as inflation is expected to slip below the 2% target this year, and it seems as though the central bank head is keeping the door open to expand monetary policy further amid the growing threat for a prolonged recession in Europe. Despite the headlines coming out of the meeting, we saw Spain's 10-Year yield climb back above 7%, while commercial banks in Portugal tapped a record EUR 60.5B from the ECB, and the Governing Council may have little choice but to implement a range of tools over the remainder of the year as the debt crisis continues to dampen the outlook for the region. As the relative strength index on the EURUSD bounces back from a low of 35, the short-term rebound in the exchange rate may gather pace over the coming days, but we should see the downward trending channel from 2011 continue to take shape as the fundamental outlook for the region deteriorates further.

British Pound: U.K. Takes Further Steps To Balance Budget, Consolidation Ahead

The British Pound is giving back the overnight advance to 1.5512 as market participants scaled back their appetite for risk, but we may see the sterling take on a safe-haven role as the U.K. government increases its effort to shield the region from the debt crisis. According to a report by the Sunday Telegraph, the Office for Budget Responsibility plans to unveil another GBP 50B in spending cuts or will look to increase taxes to bring down the deficit, but the new measures may put increased pressure on the Bank of England to expand monetary policy further as the slowing recovery dampens the outlook for growth and inflation. As the GBPUSD maintains the range-bounce price action carried over from the previous month, we may see the pair continue to give back the rebound from 1.5268 ahead of the BoE Minutes due out on July 18, and the fresh batch of central bank rhetoric should provide a clearer picture for the pound-dollar as market participants weigh the outlook for monetary policy.

U.S. Dollar: Struggles Ahead Of North American Trade, Fed's Williams On Tap

The greenback is struggling to hold its ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight advance to 10,191, but we may see the reserve currency regain its footing during the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for the next 24-hours of trading, we should see risk trends dictate price action for the major currencies, but comments from San Francisco President John Williams, who also serves as a voting FOMC member this year, may instill a bullish outlook for the USD should he strike an improved outlook for the world's largest economy. As the FOMC extends 'Operation Twist,' it seems as though the committee its moving away from quantitative easing, and Mr. Williams may sound a bit more hawkish this time around as the recovery gets on a more sustainable path.

--- Written by David Song, Currency Analyst

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

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