Talking Points

  • Euro: EU Summit Disappoints, ECB To Ease Policy Further
  • British Pound: RSI Dips Into Oversold, BoE Miles Highlights Above-Target Inflation

Euro: EU Summit Disappoints, ECB To Ease Policy Further

The EU Summit failed to prop up the Euro amid the ongoing rift within the group, and we may see European officials continue to act in their own interest as the anti-austerity movement gathers pace. As French President Francois Hollande and Italian Prime Minister Mario Monti press for increased integration, German Chancellor Angela Merkel may come under increased pressure to push through a euro-area bond, but we may see the EU use this opportunity to buy more time as the governments operating under the single currency look for additional monetary support.

As the EU struggles to meet on common ground, there's growing speculation that the European Central Bank will carry its easing cycle into the second-half of the year, and we may see the Governing Council take a more aggressive approach in shoring up the economy as the threat of a Greek exit continues to materialize. Nevertheless, it seems as though the 1.2500 figure is providing psychological support as the EURUSD remains oversold, and we may see a short-term correction take shape in the coming days as the relative strength index bounces back from the lowest level since May 2010. However, we are looking to sell rallies in the EURUSD as the fundamental outlook for the region turns increasingly bleak, and we may see former support around the 1.30000 figure act as new resistance as we expect to see a lower high in the exchange rate.

British Pound: RSI Dips Into Oversold, BoE Miles Highlights Above-Target Inflation

The British Pound pared the overnight decline to 1.5638 even as the preliminary GDP report showed an even larger contraction in the first-quarter, and the sterling may continue to retrace the decline from earlier this month as the Bank of England sticks to its wait-and-see approach. BoE board member David Miles said the 'exceptionally expansionary' policy remains appropriate as the U.K. slips back into recession, but highlighted the risks of a prolonged period of above-target inflation as policy makers expect to see a more robust recovery later this year. In turn, it seems as though the Monetary Policy Committee will preserve its neutral policy stance over the medium-term, but there may be increased pressure to start normalizing monetary policy as the central banks' credibility to preserve price stability comes under increased scrutiny. As the GBPUSD holds above the 1.5600 figure, the pair could be carving out a higher low ahead of June, but we will be keeping a close eye on the relative strength index as it dips into oversold territory.

More to Follow...

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong