Talking Points

  •  Euro: IMF Calls For Bank Recapitalization, Range-Bound Prices Ahead
  •  British Pound: Retraces Monthly Decline Ahead Of U.K. Event Risk

Over the weekend, International Monetary Fund Managing Director Christine Lagarde said recapitalizing the banking system in Europe 'is key to cutting the chains of contagion, and went onto say that monetary policy should remain 'highly accommodative' as the region faces a slowing recovery. In response, Germany's Finance Ministry argued that steps have already been taken, noting the new rules under Basel III, and noted that the 'instruments of the strengthened European Financial Stability Facility are available' while speaking in Berlin.

As the fundamentals for Europe highlight a weakened outlook for growth and inflation, we expect the European Central Bank to uphold its current policy throughout the remainder of the year, and market participants may diversify away from the single-currency as ECB President Jean-Claude Trichet softens his hawkish tone for monetary policy. In turn, the EUR/USD may trade heavy over the near-term, but we may see the exchange rate continue to consolidate in the days ahead as it retraces the decline from the previous month. As the euro-dollar trades back above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, it seems as though the pair will trade sideways going into September, and we may have an opportunity to take advantage of the range-bound price action as the recent rally fails to produce a test of the July high (1.4577).

The British Pound extended the rebound from Friday to reach a high of 1.6408, and the sterling may continue to gain ground over the next 24-hours of trading as risk appetite continues to flow into the currency market. As the economic docket this week is expected to show a pickup in private sector activity, a slew of positive developments could lead the GBP/USD to retrace the decline from earlier this month, and exchange rate may work its way back towards the yearly high (1.6745) as the pair appears to be trading within an upward trend channel. However, the cautious tone held by the Bank of England may impede on the sterling, and comments from the central bank may highlight an increased willingness to expand monetary policy further as Governor Mervyn King sees a risk of undershooting the 2% target for inflation.