Euro Struggles As Spain Yield Tops 7%, Sterling Offers Clean Range

Talking Points

• Euro: Spain 10-Year Yields Tops 7%, ECB To Endorse ZIRP
• British Pound: Maintains Range-Bounce Prices, All Eyes On BoE Minutes

Euro: Spain 10-Year Yields Tops 7%, ECB To Endorse ZIRP

The Euro struggled to hold its ground on Friday as the yield tied to Spain's 10-Year debt topped 7%, while Finland threatened to leave the monetary union as the governments operating under the fixed-exchange rate system struggle to get their house in order. In response, European Commission President Jose Barroso pledged to monitor the situation in Spain 'very closely' and went onto say that the group will have 'permanent contact' with the government as the sovereign debt crisis continues to dampen the outlook for the region.

In turn, there's growing speculation that the European Central Bank will take additional steps to shore up the ailing economy, and we may see the Governing Council endorse a zero interest rate policy (ZIRP) in an effort to avert a prolonged recession. ECB board member Erkki Liikanen struck a dovish tone for monetary policy during an interview in Finland and said that the risk of undershooting the 2% target for inflation gave the central bank scope to lower the benchmark interest rate from 1.00% as it maintains its one and only mandate to ensure price stability. As the slowing recovery in Europe dampens the outlook for price growth, the ECB looks poised to carry out its easing cycle throughout the second-half of the year, and we should see the Euro face additional headwinds over the near-term as interest rate expectations falter. We're still looking for fresh yearly lows in the EURUSD as the downward trending channel continues to take shape, and the bearish sentiment surrounding the single currency may pick up in the week ahead as European policy makers struggle to restore investor confidence.

British Pound: Maintains Range-Bounce Prices, All Eyes On BoE Minutes

The British Pound pared the decline from earlier this week to maintain the range-bounce price action carried over from June, and the sterling may continue to track sideways in the days ahead as market participants weigh the fundamental outlook for the U.K. There's increased speculation surrounding the Bank of England Minutes as the central bank raised its asset purchase target to GBP 375B, and it seems as though the Monetary Policy Committee is nearing the end of its easing cycle as it keeps the benchmark interest rate at 0.50%. In turn, we may see the GBPUSD continue to trade between 1.5500-1.5750 ahead of the policy statement due out on July 18, and the fresh batch of central bank rhetoric should paint a clearer picture for the sterling as the medium-term outlook for the U.K. remains clouded with high uncertainty.

--- Written by David Song, Currency Analyst

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