Talking Points

  • Euro: Remains Oversold, Germany Vows Additional Assistance For Greece
  • British Pound: Rebounds Ahead Of Key Event Risks, BoE Posen Mulls More QE
  • U.S. Dollar: Index Falls Back From Fresh 2012 High Ahead Of G8 Summit

Euro: Remains Oversold, Germany Vows Additional Assistance For Greece

The Euro bounced back from a fresh monthly low of 1.2641 as a spokesperson for the EU denied rumors that the group is working on a contingency plan for a Greek exit, while German Chancellor Angela Merkel showed an increased willingness to further assist Greece as the sovereign debt crisis continues to dampen the outlook for the region. At the same time, German Finance Minister Wolfgang Schaeuble encourage the EU to 'form a common position as quickly as possible' as the group heads into G8 meeting, but warned that debt crisis may continue to weigh on the financial market for another two-years as European policy makers struggle to restore investor confidence.

As the EU maintains a reactionary approach in addressing the risk for contagion, the European Central Bank is certainly coming under increased pressure to shore up the ailing economy, and there's speculation that the Governing Council will take additional steps at the next meeting on June 6 as the fundamental outlook for the region turns increasingly bleak. According to Credit Suisse overnight index swaps, investors are currently pricing an 11% chance for a 25bp rate, but the ECB may show an increased willingness to target the benchmark interest rate as the non-standard measures have a limited impact in addressing the risks surrounding the region. As the EURUSD continues to trade above the 23.6% Fibonacci retracement around 1.2640-50, it seems as though the pair is carving out a short-term base, and we will be keeping a close eye on the relative strength index as it continues to sit in oversold territory. Should the oscillator cross back above 30 next week, we will be watching former support around the 1.3000 figure for new resistance, and we will be looking for opportunities to sell the single currency as we expect to see fresh 2012 lows in the exchange rate.

British Pound: Rebounds Ahead Of Key Event Risks,BoE Posen Mulls More QE

The British Pound regained its footing during the overnight trade, with the GBPUSD snapping back from a fresh monthly low of 1.5731, but the economic developments on tap for the following week may drag on the sterling as the Bank of England turns increasingly dovish. Indeed, we're expecting to see the headline reading for inflation expand at the slowest pace since September 2010, while the BoE Minutes may reinforce expectations for more quantitative easing as the central bank sees a renewed risk of undershooting the 2% target for price growth. Indeed, Monetary Policy Committee member Adam Posen argued that he may have been overly optimistic on the economy after scaling back his vote to expand the asset purchase program by another GBP 25B, and curbed his outlook for core of inflation despite the stickiness in price growth. Even though we're seeing the RSI hold above oversold territory, we may see the recent weakness in the GBPUSD gather pace next week as market participants increase bets for additional monetary support, and we may see the pair come up against the 1.5600 figure as it continues to search for support.

U.S. Dollar: Index Falls Back From Fresh 2012 High Ahead Of G8 Summit

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a fresh yearly high of 10,153, and the reserve currency may consolidate throughout the North American trade amid the rebound in risk-taking behavior. As the G8 Summit comes into focus, the group may try to talk up market sentiment, but we don't expect to see any major developments over the weekend as European policy makers continue to look at the ECB for relief. Nevertheless, as the economic docket for the following week is expected to instill an improved outlook for the U.S., a slew of positive developments should continue to dampen speculation for additional monetary support, and we may see the greenback track higher in the week ahead as the Fed moves away from its easing cycle.

--- Written by David Song, Currency Analyst

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