Talking Points

  • Euro: Unemployment Hits Record High, Mixed Bets On ECB
  • British Pound: Sideways Price Action Ahead, More QE To Threaten Range

Euro: Unemployment Hits Record High, Mixed Bets On ECB

The Euro slipped to a low of 1.2585 as the jobless rate climbed to 11.1% from 11.0% in April, and the single currency may continue to give back the rebound from June as the European Central Bank is widely expected to ease monetary policy further in July. According to a Bloomberg News survey, 49 of the 60 economists polled see a 25bp rate cut this week, while investors are now pricing a 35% chance for lower borrowing costs, but we may see the Governing Council implement a range of tools to shore up the ailing economy as the region continues to face a risk for a prolonged recession.

Indeed, market participants see scope for additional bond purchases paired with another Long Term Refinancing Operation amid the ongoing turmoil in the financial system, and the central bank may have little choice but to carry out its easing cycle throughout the second-half of the year as the outlook for growth and inflation deteriorates. As the EURUSD remains capped by 1.2750, we may have an opportunity to take advantage of the range-bound price action in the exchange rate, and we may see the euro-dollar work its way back towards the 1.2400 figure as currency traders weigh the outlook for monetary policy. Although we continue to favor a bearish outlook for the EURUSD, the fresh batch of central bank rhetoric is likely to set the tone for July, and we will need to see the central bank continue to strike a dovish tone for monetary policy for the downward trend in the exchange rate to gather pace over the near-term.

British Pound: Sideways Price Action Ahead, More QE To Threaten Range

The British Pound tracked lower during the overnight trade as market participants scaled back their appetite for risk, and the sterling may threaten the sideways price action carried over from June as market participants see the Bank of England expanding its asset purchase program beyond the GBP 325B target. Indeed, 39 of the 41 economists polled by Bloomberg see the Monetary Policy Committee implementing more quantitative easing this month, but we may see the majority continue to endorse a wait-and-see approach as the stickiness in underlying price growth raises the threat for inflation. As the GBPUSD struggles to hold above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, the near-term outlook remains tilted to the downside, and we may see the pair make another run at the 50.0% Fib around the 1.5270 figure should the BoE strike a dovish outlook for monetary policy.

More to Follow...

--- Written by David Song, Currency Analyst

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