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Euro Under Pressure Amid Greek Threats, Sterling Supported By BoE

by DailyFX - Forex Market News on May 8, 2012

in Forex, Technical Analysis

Talking Points

  • Euro: Greece Threatens To Reject Bailout Terms, Need Close Below 1.3000
  • British Pound: Former BoE Members Talk Down Bets For More QE
  • U.S. Dollar: Fed’s Dudley Softens Dovish Tone, Central Bank Hawks On Tap

Euro: Greece Threatens To Reject Bailout Terms, Need Close Below 1.3000

The Euro slipped to 1.2989 as rising finance costs across the European periphery raised the threat for contagion, and the bearish formation in the EURUSD should continue to take shape as the fundamental outlook for the region turns increasingly bleak. Indeed, Greece sold EUR 1.0B in 182-Day bills yielding 4.69%, which compares to the 4.55% offered in April, while Greek policy makers are still making an effort to form a government as Alexis Tsipras of the left wing party threatens to reject the terms of the EU-IMF bailout.

As European policy makers struggle to meet on common ground, the lack of coordination certainly dampens the outlook for the region, and we may see the governments operating under the single currency become increasingly reliant on monetary support as the economy remains at risk for a prolonged recession. According to Credit Suisse overnight index swaps, market participants continue to see scope for a rate cut in the next 12-months as the European Central Bank’s non-standard measures have a limited impact in addressing the sovereign debt crisis, and the single currency is likely to face additional headwinds in the coming days as European policy makers fail to restore investor confidence. As the EURUSD continues to approach the apex of the descending triangle, we are still waiting for a major selloff in the exchange rate, but we would need to see the pair close below support around 1.3000 to reinforce our bearish forecast for the euro-dollar.

British Pound: Former BoE Members Talk Down Bets For More QE

The British Pound weakened to 1.6124 as market participants scaled back their appetite for risk, but the sterling may hold steady ahead of the Bank of England interest rate decision as the GBPUSD trades within the previous day’s range. Indeed, former BoE members Andrew Sentance, John Gieve and Charles Goodhart talked down speculation for more quantitative easing, with Mr. Sentance seeing scope for a rate hike later this year, while Mr. Gieve said the central bank may extend its asset purchase program for ‘a month or two’ amid the ongoing uncertainties surrounding the region. As the Monetary Policy Committee moves away from its easing cycle, we should see the bullish sentiment underlining the sterling gather pace throughout 2012, but we are still looking for a test of former resistance around 1.6000 as the relative strength index continues to come off of overbought territory.

U.S. Dollar: Fed’s Dudley Softens Dovish Tone, Central Bank Hawks On Tap

The greenback pared the decline from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to 9,967, and the reserve currency may appreciate further during the North American trade as the U.S. equity market opens lower. Nevertheless, as Richmond Fed President Jeffrey Lacker and Dallas Fed President Richard Fisher are scheduled to speak later today, hawkish rhetoric from central bank officials should help to prop up the greenback, and we may see the FOMC continue to move away from its easing cycle as the economic recovery gradually gathers pace. Indeed, New York Fed President William Dudley said the FOMC would drop its asset purchase program ‘the moment they become inconsistent with our dual mandate objectives,’ and the committee may continue soften its dovish tone for monetary policy as the stickiness in underlying price growth raises the risk for inflation.

— Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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