Euro To Slide Further As Spain Remains At Risk- ECB Under Fire

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Talking Points

  • Euro: Fitch Sees Spain Missing Deficit Target, ECB’s Credibility At Risk

  • British Pound: U.K. Household Credit Rises The Most On Record, RSI In Focus

  • U.S. Dollar: New Home Sale To Rise In August, Fed’s Evans On Tap

Euro: Fitch Sees Spain Missing Deficit Target, ECB’s Credibility At Risk

The EURUSD slipped to a fresh weekly low of 1.2842 as Fitch Ratings fired warning shots against Spain and said the region may fall short of its 2012 budget target, while the yield tied to the regions 10-Year debt climbed back above 6% as the European Commission sees an ongoing debate over the permanent bailout fund.

As the group looks to limit the European Stability Mechanism’s scope to recapitalize the banking system, there’s growing speculation that Spain will not be able to obtain its EUR 100B bailout package through the ESM, and the governments operating under the fixed-exchange rate system may seek additional support from the European Central Bank as the EU struggles to meet on common ground.

In response, Bundesbank President Jens Weidmann warned that the Outright Monetary Transactions has put the central bank’s independence at risk and argued that the non-standard measure may hinder future reforms in Europe, while former ECB board member Otmar Issing said the Governing Council is at risk of losing its credibility as the new measure only helps to buy more time.

As the ongoing threat for contagion drags on investor confidence, we should see the EURUSD continue to give back the advance from the end of July, and we anticipate to see further declines over the remainder of the week should the exchange rate close below the 20-Day SMA (1.2835) for the first time since August. In turn, we may see the EURUSD come up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 to test for interim support, but the pair may looks poised to make another run at the 1.2000 figure over the near to medium-term as it carves out a lower high in September.

British Pound: U.K. Household Credit Rises The Most On Record, RSI In Focus

The British Pound tagged an overnight low of 1.6148 as currency traders scaled back their appetite for risk, but the sterling remains poised to outperform against its major counterparts amid the shift in the policy outlook.

Indeed, the Bank of England sounded rather upbeat towards the U.K. economy as the central bank’s survey showed credit available to households increased the most since recordkeeping began in 2007, and we should see the Monetary Policy Committee endorse a wait-and-see approach over the coming months as the new lending program is expected to boost private sector activity.

Although we’re bullish on the sterling, the GBPUSD remains poised for near-term correction, and we may see a more meaningful move to the downside should the relative strength index on the pound-dollar fail to preserve the upward trend from back in June.

U.S. Dollar: New Home Sale To Rise In August, Fed’s Evans On Tap

The greenback continued to retrace the decline from earlier this month, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 9,875, and the reserve currency may appreciate further during the North American trade as risk sentiment falters.

However, as the economic docket is expected to show New Home Sales increasing another 2.2% in August, a positive development may help to shore up market confidence, while Chicago Fed President Charles Evans may fuel speculation for additional monetary support as he continues to highlight the persistent slack in the labor market. In turn, the dollar may consolidate going into the end of the week, but the negative headlines coming out of Europe should continue to prop up the reserve currency as it benefits from safe-haven flows.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

14:00

10:00

ECB's Jens Weidmann Speaks on Euro Economy

   

USD

14:00

10:00

New Home Sales (MoM) (AUG)

2.2%

3.6%

 

USD

14:00

10:00

New Home Sales (AUG)

380K

372K

 

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (SEP 21)

 

8534K

 

USD

14:30

10:30

DOE U.S. Gasoline Inventories (SEP 21)

 

-1407K

 

USD

14:30

10:30

DOE U.S. Distillate Inventory (SEP 21)

 

-322K

 

EUR

16:00

12:00

French Total Jobseekers Change (AUG)

27.5

41.3

 

EUR

16:00

12:00

French Total Jobseekers (AUG)

 

2987.1k

 

USD

17:15

13:15

Fed's Charles Evans Speaks on U.S. Economy

   

--- Written by David Song, Currency Analyst

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

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