Talking Points

  • Euro: Italy, Portugal To Cut Spending Further
  • British Pound: All Eyes On BoE Minutes
  • U.S. Dollar: Mixed Against Majors, Retail Sales On Tap

The Euro pared the overnight decline to 1.4149 and the single-currency may continue to gain ground throughout the North American trade as policy makers step up their efforts to address the sovereign debt crisis. Italy announced the government will hold an emergency meeting today in order to pass new budget-cutting measures, and lawmakers may make a greater push to cut the deficit as the public debt jumped to a record high of EUR 1.9 trillion in June. At the same time, a Portuguese newspaper said Finance Minister Vitor Caspar will layout additional spending cuts, which could total anywhere between EUR 1.0 to 1.5 billion, and the new measures should help to ease the risk for contagion as policy makers take additional steps to restore investor confidence.

However, the austerity measures could lead to a protracted recover as we already see a slowdown in economic activity, and the European Central Bank may have little choice but to carry the 1.50% interest rate into the following year as growth and inflation cool. As ECB President Jean-Claude Trichet softens his hawkish outlook for monetary policy, we should see the EUR/USD continue to trade within a bearish pattern, and the single-currency looks poised to trend lower over the near-term as interest rate expectations falter. As price action continues to approach the apex of the descending triangle, the recent rebound in the euro-dollar is likely to be short-lived, and we could see the pair threaten the reversal from 1.3836 as the economic outlook for European policy makers struggle to address the risks for the region.

The British Pound fell back from a high of 1.6297 and the sterling may continue to consolidate in the following week as the Bank of England minutes take center stage. Indeed, market participants will keep a close eye on the vote count in light of the recent comments from the central bank, and we may see a shift within the MPC as policy makers see a heightened risk of undershooting the 2% target for inflation. We should see the committee endorse a wait-and-see approach for the remainder of the year, but comments highlighting an increased willingness to expand the asset purchase program beyond the GBP 200B target is likely to spark a sharp decline in the exchange rate as it suggests a growing risk for a double-dip recession. In turn, the GBP/USD may continue to retrace the rebound from 1.5781, and the sterling may trade heavy throughout the remainder of the year as the region copes with a tepid recovery.

U.S. dollar price action was largely mixed during the overnight trade, but we may see the greenback struggle to hold its ground as risk appetite appears to be flowing back in the currency market. As equity futures foreshadow a higher open for the U.S. market, we may see FX traders increase their appetite for yields, and a positive U.S. retail sales report could fuel a rebound in trader sentiment as it raises the outlook for future growth.