Talking Points

  • Euro: Merkel's Christian Democratic Union Comes Under Pressure, Banks Curb Lending
  • British Pound: BoE To Restart Asset Purchases, Threatens Rebound From 1.5781
  • U.S. Dollar: Rebound Gathers Pace During Holiday Trade

Euro: Merkel's Christian Democratic Union Comes Under Pressure, Banks Curb Lending

The Euro tumbled to a low of 1.4107 as German Chancellor Angela Merkel's Christian Democratic Union lost the election in six states, while a report by the European Central Bank showed lenders parked EUR 151.1B with the ECB overnight to mark the biggest deposit since August 2010. Fading support for Chancellor Merkel's initiatives to contain the sovereign debt crisis may come under increased scrutiny as taxpayers are force to foot the bill, and we are likely to see an increased reliance on the central bank to address the risks for the region as European policy makers struggle to meet on common ground.

As banks across the region scale back on lending, increased turmoil in the financial system is likely to further dampen economic activity, and the slowing recovery in Europe may lead ECB President Jean-Claude Trichet to adopt a dovish tone for monetary policy as the fundamental outlook remains clouded with high uncertainty. In turn, the Governing Council may continue to delay its exit strategy further, and the group may show an increased willingness to adopt additional measures to stimulate the economy at the interest rate decision scheduled for later this week. As the near-term correction in the EUR/USD gathers pace, the exchange rate may threaten the rebound from 1.3836, and the single-currency may trade heavy throughout the remainder of the year as European policy makers struggle to restore investor confidence.

British Pound: BoE To Restart Asset Purchases, Threatens Rebound From 1.5781

The British Pound bounced back from an overnight low of 1.6089, but the sterling could face additional headwinds over the near-term as market participants see the Bank of England restarting its asset purchases in September. As the U.K. faces a slowing recovery, the BoE is expected to reinstate its emergency measures to stem the risks for the economy, but we may see a growing shift within the Monetary Policy Committee as board member Adam Posen maintains his vote to expand the asset purchase program beyond the GBP 200B target. Although the committee is widely expected to maintain its current policy later this week, market participants may still show a bearish reaction to the rate decision on speculation for additional monetary stimulus, and the GBP/USD may give back the rebound 1.5781 as the exchange rate struggles to hold above the 200-Day moving average at 1.6120.

U.S. Dollar: Rebound Gathers Pace During Holiday Trade

The U.S. dollar continued to gain ground on Monday and the reserve currency should continue to trend higher throughout the remainder of the day as it benefits from safe-haven flows. However, thin trading conditions could produce choppy price action as U.S. traders remain offline for the holiday weekend, and the shift in risk sentiment may gather pace over the next 24-hours of trading as the fundamental outlook for the global economy remains clouded with high uncertainty. As market participants return to their desks on Tuesday, the dismal Non-Farm Payrolls report may come back into focus, and the slew of data scheduled for this week could further dampen the prospects for future growth as the world's largest economy faces a slowing recovery. In turn, risk aversion may continue to flow into the currency market over the coming days, and the greenback looks poised to recoup the losses from the previous month as investors scale back their appetite for yields.