Euro Euphoria to Fizzle on ECB- EU Looks to Buy More Time

DailyFX

Talking Points

  • Euro: EU Pledges to Combat Unemployment, ECB to Remain Accommodative
  • British Pound: U.K. Retail Sales Disappoints, BoE Votes 6-3
  • U.S. Dollar: Chairman Bernanke, FOMC Minutes in Focus

Euro: EU Pledges to Combat Unemployment, ECB to Remain Accommodative

The Euro climbed to an overnight high of 1.2954 asEuropean Union Economic and Monetary Affairs Commissioner Olli Rehn pledged to do whatever it takes to combat record-high unemployment, but it seems as though the European Central Bank (ECB) will come under increased pressure to further support the monetary union as Mr. Rehn anticipates monetary policy to remain accommodative.

However, German Finance Minister Wolfgang Schaeuble argued that the Governing Council should not keep interest rates low for an extended period of timeas the governments operating under the single currency become increasingly reliant on monetary support, and we may see the EU make further attempts to buy more time as the group struggles to meet on common ground.

As European officials scale back their push for austerity, we should see the ECB continue to embark on its easing cycle in the second-half of the year, and it seems as though the central bank will introduce more non-standard measures in the coming months to help steer the region out of recession. At the same time, there’s growing bets that President Mario Draghi will deliver another 25bp rate cut at the June 6 meeting, and we may see a growing number of ECB officials favor a negative interest rate policy (NIRP) for the euro-area as the economic downturn threatens price stability.

Indeed, the head-and-shoulders formation in the EURUSD should continue to take shape as long as the pair holds below the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, and the policy outlook is likely to produce further declines in the exchange rate as interest rate expectations falter.

British Pound: U.K. Retail Sales Disappoints, BoE Votes 6-3

The British Pound slipped to a fresh monthly low of 1.5073 as U.K. Retail Sales tumbled 1.4% in April amid forecasts for a 0.1% rise, but the shift in the policy outlook may prop up the sterling over the near to medium-term as the Bank of England (BoE) appears to be slowly moving away from its easing cycle.

Indeed, the BoE Minutes showed another 6-3 split within the Monetary Policy Committee, with Governor Mervyn King, David Miles and Paul Fisher continuing to push for another GBP 25B expansion in the Asset Purchase Facility, but it seems as though the central bank will carry its wait-and-see approach into the second-half of the year as the board sees inflation holding above the 2% target over the policy horizon. At the same time, the BoE did note that the persistent weakness in the euro-area may push up the Pound, but it seems as though the majority will stay clear of expanding the balance sheet further as more quantitative easing would complicate the exit strategy.

As the GBPUSD continues to give back the rebound from back in March (1.4830), we may see the pair develop a broader downward trend in the days ahead, but an upward revision in the preliminary 1Q GDP report may prop up the sterling over the next 24-hours of trading as it dampens bets for more QE.

U.S. Dollar: Chairman Bernanke, FOMC Minutes in Focus

The greenback managed to hold its ground ahead of Fed Chairman Ben Bernanke’s testimony, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tagging a high of 10,814, and the reserve currency may continue to track higher during the North American trade should the central bank head strike an improved outlook for the world’s largest economy.

Beyond the testament, market participants will also be paying close attention FOMC Minutes coming out at 18:00 GMT, and the fresh batch of central bank rhetoric may heighten the appeal of the USD should we see the committee adopt a more neutral to hawkish tone for monetary policy. In turn, we may see a fairly muted reaction to the Existing Home Sales report, and the policy outlook may push the dollar higher in the second-half of the year as we see a growing number of Fed officials show a greater willingness to scale back on QE.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Fed Chairman Ben Bernanke Testifies on Economic Outlook

USD

14:00

10:00

Existing Home Sales (APR)

4.99M

4.92M

USD

14:00

10:00

Existing Home Sales (MoM) (APR)

1.3%

-0.6%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAY 17)

-624K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAY 17)

2300K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAY 17)

2588K

EUR

16:30

12:30

ECB's Peter Praet Speaks on Monetary Policy

USD

18:00

14:00

Federal Open Market Committee Meeting Minutes

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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