Talking Points

  • Euro: 2Q GDP Disappoints, All Eyes On Merkel & Sarkozy
  • British Pound: BoE King Writes Letter Of Explanation
  • U.S. Dollar: Regains Footing On Risk Aversion

The slowing recovery in Europe pushed the EUR/USD to a low of 1.4353 and the single-currency may continue to give back the advance from the previous week as fears surrounding the sovereign debt crisis resurface. German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet later today in order to calm market jitters, but the euro-area leaders may struggle to prop up investor confidence should they fail to take additional steps to curb the risk for contagion.

Merkel and Sarkozy are widely expected to increase pressures on the European periphery to address the budget deficit, but there are market rumors that the two may discuss the possibility of a euro-bond in an effort to support the monetary union. However, as German officials oppose any sort of joint-borrowing, European policy makers may have to lean in a different direction, and the EU may look at the European Central Bank for increased assistance as the ongoing turmoil within the financial system bears down on the economy. As the economic outlook for the euro-area remains clouded with high uncertainty, we expect the ECB to carry the 1.50% interest rate into the following year, and President Jean-Claude Trichet may continue to soften his hawkish tone for monetary policy as growth and inflation cool. In turn, we should see the EUR/USD continue to trade within a bearish pattern, and the pair looks poised to retrace the rebound from earlier this month (1.4055) as price action fails to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60.

Heightening price pressures in the U.K. propped up the sterling during the overnight trade, and the British Pound may continue to recoup the losses from earlier this month as market participants scale back expectations for additional monetary stimulus. In response to the faster rate of inflation, Bank of England Governor Mervyn King will take the appropriate action to achieve price stability, but continued to see a risk of undershooting the medium-term target for inflation in his letter of explanation to Chancellor of the Exchequer George Osborne. As the BoE preserves its wait-and-see approach, the policy meeting minutes will certainly take center stage over the next 24-hours of trading, and the developments coming out of the Monetary Policy Committee is likely to heavily influence the Pound as investors weigh the outlook for monetary policy. In turn, the GBP/USD may hold steady throughout the North American trade, but a growing shift within the MPC could spark a major reaction in the exchange rate should the central bank show an increased willingness to expand the asset purchase program beyond the GBP 200B target.

The U.S. dollar advanced against most of its major counterparts during the overnight trade and the reserve currency may continue to recoup the losses carried over from the previous week as market participants scale back their appetite for yields. As the slowing recovery in the global economy bears down on trader sentiment, the greenback looks poised to appreciate further during the North American session, and the risk-off trading environment should carry through the next 24-hours of trading as equity futures foreshadow a lower open of the U.S. market.