Talking Points

  • U.S. Dollar: Consumer Confidence, New Home Sales On Tap
  • Euro: Breaks Above 78.6% Fib, ECB Sees Slowing Recovery
  • British Pound: U.K. GDP, Service-Based Activity Expand

Ongoing fears surrounding the U.S. debt ceiling weighed on the greenback throughout the overnight trade, but the greenback may regain its footing during the North American session as the economic docket is expected to show an improved outlook for the world's largest economy. A rebound in new home sales paired with a rise in the Richmond Fed Manufacturing index should help to boost the prospects for future growth, but the pullback in consumer confidence could spark a mixed reaction amongst currency traders as private sector consumption accounts for more than two-thirds of the economy. Beyond the event risk scheduled for Tuesday, the stalemate amongst U.S. policy makers will continue to take center stage as we approach the August deadline, and market participants may continue to diversify away from the greenback even as officials expect the government to reach an agreement.

In light of the weakness surrounding the greenback, the EUR/USD crosses back above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60 to reach a high of 1.4521, and the pair may continue to threaten the downward trending channel carried over from earlier this year as the fundamental outlook for the U.S. remains clouded with uncertainties. At the same time, the euro may face additional headwinds as well as the region faces a slowing recovery, and the near-term rally in the single-currency may taper off as European policy makers struggle to stem the risk for contagion.

As the sovereign debt crisis continues to dampen the outlook for the region, the European Central Bank may further soften its hawkish tone for monetary policy, and the Governing Council may endorse a wait-and-see approach throughout the remainder of the year in an effort to balance the risks for growth and inflation. Indeed, ECB board member Lorenzo Bini Smaghi noted a less robust recovery during an interview with CNBC and went onto say that the EU waiting too long to tackle the debt crisis in Greece as the risk for contagion bears down on market sentiment. Nevertheless, questions regarding the implementation of the new bailout will certainly come into focus as parliaments across Europe are scheduled to vote on the extraordinary measures, and the relief rally in the EUR/USD may come under pressure should the Governing Council continue to talk down speculation for higher borrowing costs.

The British Pound rallied to 1.6420 in light of the positive developments coming out of the U.K., and the GBP/USD may continue to retrace the decline from the previous month (1.6494) as growth prospects improve. However, the recent data is certainly not enough to spur a material change in the fundamental outlook, and we expect to see the Bank of England maintain its wait-and-see approach throughout the remainder of the year in an effort to stimulate a sustainable recovery. According to Credit Suisse overnight index swaps, market participants are pricing the benchmark interest rate to hold relatively steady over the next 12-months, and GBP/USD may consolidate in the days ahead as the relative strength index approaches overbought territory.