Talking Points

  • Euro: Confidence Falters, Credit Conditions To Tighten
  • British Pound: Maintains Narrow Range Ahead Of Key Event Risks
  • U.S. Dollar: Pending Home Sales On Tap, Debt Deal In Focus

The slew of dismal data out of Europe pushed the single-currency to an overnight low of 1.4268, and the single-currency may continue to trade heavy in the North American trade as economic outlook for the region turns bleak. A survey by the European Central Bank showed lenders plan to tighten credit standards in the third quarter, and the slowing recovery in the euro-area is likely to become more apparent in the second-half of the year as governments across the region implement tough austerity measures to balance the budget deficit.

As public sector spending wanes, the will be an increased focus on private sector activity to generate growth, and the slowdown is likely to dampen the outlook for inflation as policy maker see price growth falling below the 2% target towards the end of the year. In turn, we should see ECB President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy, and interest rate expectations are likely to deteriorate further as the central bank head endorses a wait-and-see approach. As the EUR/USD continues to trade within a descending triangle, we should see the exchange rate consolidate further over the remainder of the week, and the correction could produce a test of 1.4000 as the pair continues to mark lower highs. As the heightening risk for contagion continues to bear down on market sentiment, the technical pattern appears as though it will continue to play out in the following month, and the euro-dollar remains at risk of a bearish breakout as price action approaches the apex.

The British Pound pared the overnight decline to 1.6295 and the GBP/USD may hold a narrow range ahead of Friday as the economic docket is expected to encourage an improved outlook for Britain. Indeed, a rise in U.K. mortgage approvals paired with the ongoing expansion in consumer credit is likely to spark a bullish reaction in the sterling, but the sterling may struggle to hold its ground in the North American session as there appears to be a shift away from risk-taking behavior. As private sector activity picks up, the data may encourage the Bank of England to adopt an improved outlook for region, and the central bank may see scope to retain its current policy throughout the remainder of the year as the fundamental outlook remains clouded with high uncertainty. As the rebound from 1.5781 fails to produce a test of the June high (1.6494), it seems as though the GBP/USD will consolidate in the days ahead, and the exchange rate may trade within a broad range over the near-term as the BoE maintains a balanced tone for future policy.

The U.S. dollar advanced against most of its major counterparts during the overnight session, but the greenback may struggle to hold its ground over the remainder of the day as there appears to be shift in market sentiment. As equity futures foreshadow a higher open for the U.S. market, a rebound in risk appetite could dampen demands for the reserve currency, but fears surrounding the debt ceiling will certainly take center stage as the House of Representatives is scheduled to vote on the Republican's plan to cut government spending by $917B over the next 10-years. However, given the strong opposition in the Senate, a failed attempt to avert a default could weigh on the greenback, and market participants may continue to diversify away from the greenback as we approach the August 2 deadline.