Talking Points

  • Euro: Spanish Banks Face Rating Downgrades, RSI Still In Oversold Territory
  • British Pound: U.K. Sticks To Austerity, Prepares Contingency Plan For Greek Exit

Euro: Spanish Banks Face Rating Downgrades, RSI Still In Oversold Territory

The Euro slipped to a fresh monthly low of 1.2660 as the heightening risk of a Greek exit dragged on investor confidence, and the single currency may face additional headwinds over the remainder of the week as the threat for contagion continues to sap risk-taking behavior. Indeed, Spain missed its EUR 2.5B target as it sold EUR 2.49B in bonds, with the 2015 notes yielding 4.876% versus the 4.037% offered earlier this month, and European policy makers may put increased pressure on the European Central Bank to expand its balance sheet further as the fundamental outlook for the region turns increasingly bleak.

As the EU maintains a reactionary approach in addressing the debt crisis, there are rumors that a slew of Spanish banks will be downgraded later today, but it seems as though the ECB will stick to the sidelines as it temporarily curbs lending to the banking community in Greece. In light of the recent developments, it seems as though the central bank is also preparing for a Greek exit as it reevaluates its policy tools, and we may see the Governing Council move away from its non-standard measures as they have a limited impact in addressing the risks surrounding the region. With Greek elections coming up in about four weeks, we may see the ECB stick to its wait-and-see approach at the next rate decision on June 6, but we should see the central bank carry its easing cycle into the second-half of the year as the region continues to face a risk for a prolonged recession. As the EURUSD continues to hold above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, the pair may be carving out a short-term floor going into the end of the week, but we will need to see the relative strength index cross back above 30 to see a correction take shape.

British Pound: U.K. Sticks To Austerity, Prepares Contingency Plan For Greek Exit

The British Pound extended the decline from earlier this week to tag a fresh monthly low of 1.5789, and the sterling may continue to give back the rally from earlier this year as the dovish tone struck by the Bank of England spurs speculation for more quantitative easing. Indeed, U.K. Chancellor of the Exchequer George Osborne said the BoE has the scope to ease monetary policy further as the government continues to carry out its budget-cutting measures, and went onto say that Britain is putting together a contingency plan should Greece leave the monetary union. Although the shift in central bank rhetoric dampened the outlook for the sterling, market participants may start to treat the British Pound as a safe-haven as the BoE maintains the record-low interest rate, and we may see the GBPUSD track sideways over the near-term as the pair appears to be building a short-term base around the 1.5800 figure. In turn, we will be closely watching the relative strength index going into the end of the week, and we should see a rebound in the GBPUSD as long as the oscillator holds above 30.

More to Follow...

--- Written by David Song, Currency Analyst

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