Euro Struggles as Italy Warns of Breakup, Sterling Range In Focus

  on August 06 2012 9:28 AM

Talking Points

  • Euro: Italy's Monti Warns Of Breakup, Finland Cuts Growth Forecast
  • British Pound: To Hold Range Ahead Of BoE Inflation Report
  • U.S. Dollar: Benefits From Risk Aversion, Rebounds Ahead Of Bernanke Speech

Euro: Italy's Monti Warns of Breakup, Finland Cuts Growth Forecast

The Euro slipped to a low of 1.2340 as Italian Prime Minister Mario Monti warned that the region needs greater coordination to avert a euro-area breakup, while Finland lowered its growth forecast for the following year as the government sees the region expanding 'between zero and 1 percent.' In response, the German government showed greater support for the European Central Bank to restore its asset purchase program, but we may see a growing rift within the Governing Council as Bundesbank President Jens Weidmann continues to speak out against the non-standard measure.

Nevertheless, market participants are looking for another rate cut from the ECB according to Credit Suisse overnight index swaps as the region heads for a prolonged recession and President Mario Draghi may have little choice but to carry the easing cycle into the following year as the central bank sees a greater risk of undershooting the 2% target for inflation. Although the fundamental outlook for the EURUSD remains bearish, the rebound from July (1.2040) may continue to gather pace as the relative strength index breaks out of the downward trend carried over from earlier this year. In turn, we may see the euro-dollar continue to retrace the decline from June (1.2746), but negative headlines coming out of the region may continue to sap demands for the single currency as European policy makers struggle to restore investor confidence.

British Pound: To Hold Range Ahead of BoE Inflation Report

The British Pound pared the advance to 1.5664 to maintain the range-bound price action carried over from earlier this year, and we should see the pair track sideways ahead of the Bank of England quarterly inflation report as market participants weigh the outlook for monetary policy. Indeed, there's speculation that the BoE will curb its fundamental assessment for the U.K. as the region faces a prolonged economic downturn, and Governor Mervyn King may show a greater willingness to expand the balance sheet further in an effort to lift the economy out of recession. Should the BoE sound increasingly dovish this time around, we may see the GBPUSD threaten interim support around the 1.5400 figure, but a sharp selloff in the exchange rate may spur another run at the 50.0% Fibonacci retracement from the 2009 low to high around 1.5270.

U.S. Dollar: Benefits From Risk Aversion, Rebounds Ahead Of Bernanke Speech

The greenback tracked higher on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to 10,029, and the reserve currency may appreciate further during the North American trade as market participants scale back their appetite for risk. As the economic docket remains fairly light for Monday, we should see risk-trends dictate price action across the major currencies, but speculation surrounding the Federal Reserve may spark increased volatility later today as Chairman Ben Bernanke is scheduled to speak on the economy. As the latest Non-Farm Payrolls report encourages an improved outlook for the labor market, Mr. Bernanke may sound more upbeat towards the economy, and it seems as though the FOMC will preserve its wait-and-see approach throughout the remainder of the year as the committee continues to embark on 'Operation Twist.'

--- Written by David Song, Currency Analyst

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

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