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Euro May Fail to Benefit from EU Meeting- Pound to Rally

David Song

Talking Points

  • Euro: IMF Warns of More Support for Cyprus Ahead of EU Meeting
  • British Pound: BoE Governor King Sees Greater Scope to Normalize Policy
  • U.S. Dollar: Index Remains Overbought, Fed’s Evans on Tap

Euro: IMF Warns of More Support for Cyprus Ahead of EU Meeting

The Euro climbed to an overnight high of 1.2877 as European policy makers talked down the risk of a euro-area breakup, and the single currency may continue to consolidate ahead of the EU meeting on May 22 as the group continues to push for greater fiscal integration.

However, as the governments operating under the single currency scale back their push for austerity, Bundesbank President Jens Weidmann argued France should take additional steps to balance its budget deficit, and the group of European officials struggle to meet on common ground once again as the region remains mired in a prolonged recession.

Indeed, the International Monetary Fund(IMF) warned that that the risks surrounding the Cypriot bailout program is ‘unusually high’ as the periphery country struggles to return to growth, and warned that ‘additional financing measures may be needed to preserve debt sustainability’ as the EU maintains a reactionary approach in addressing the risks surrounding the region.

In turn, the European Central Bank (ECB) may come under increased pressure to further embark on its easing cycle, and it seems as though the Governing Council will introduce more non-standard measures while implementing a negative-interest rate policy (NIRP) as the economic downturn continues to threaten price stability.

As we continue to watch the head-and-shoulders in the EURUSD take shape, the pair looks poised to make a run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and we may see the EU meeting in Brussels fail to prop up the single currency should the group make another attempt to buy more time.

British Pound: BoE Governor King Sees Greater Scope to Normalize Policy

The British Pound pared the decline from the previous week, with the GBPUSD advancing to 1.5217, and the sterling may continue to track higher in the days ahead as the Bank of England (BoE) drops its dovish tone for monetary policy.

Indeed, BoE Governor Mervyn King held an improved outlook for the U.K. as he sees a ‘modest recovery’ in the region, and highlighted a greater willingness to normalize monetary policy as the Funding for Lending Scheme continues to work its way through the real economy.

Although the BoE Minutes is expected to show another 6-3 split within the Monetary Policy Committee, we may see growing number of central bank officials adopt a more neutral to hawkish tone for the region, and the central bank may start to discuss a tentative exit strategy in the second-half of the year as the U.K. skirts a triple-dip recession.

U.S. Dollar: Index Remains Overbought, Fed’s Evans on Tap

The greenback struggled to hold its ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 10,775, and the reserve currency may continue to consolidate in the coming days as the rebound from earlier this month remains overbought.

Although the economic docket remains fairly light for the North American trade, Chicago Fed President Charles Evans is scheduled to speak later today, we may see a growing number of central bank officials talk down speculation for additional monetary support as the world’s largest economy gets on a more sustainable path. In turn, the shift in the policy outlook may produce a shallow correction in the USDOLLAR, and the bullish sentiment surrounding the greenback should gather pace over the near to medium-term as the FOMC appears to be slowly moving away from its easing cycle.

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--- Written by David Song, Currency Analyst

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

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