Euro Weighed By Spain, Sterling Outlook Hinges On Inflation Report

By David Song, Currency Analyst

Talking Points
  • Euro: Spain To Miss 2012 Deficit Target, Greece To Stay In Monetary Union
  • British Pound: BoE To Sound Increasingly Hawkish Despite Growth Concerns
  • U.S. Dollar: U. of Michigan On Tap, Sticky Core CPI To Spur Hawkish Remarks

Euro: Spain To Miss 2012Deficit Target, Greece To Stay In Monetary Union

The Euro gave back the overnight advance to 1.2955 asthe EU sees Spain missing its 2012 deficit target of 5.3%, and theheightening risk for contagion continues to cast a bearish outlookfor the single currency as European policy makers maintain areactionary approach in addressing the debt crisis. Meanwhile, thehead of Greece’s New Democratic Party, Antonis Samaras, saidthe four parties agreed to stay in the union, but anti-austeritymovement may continue to fuel speculation for a euro-area exit asthe region struggles to draw up a coalition government.

As the EU struggles to meet on common ground, we are likely to see the governments operating under the single currency become increasingly reliant on monetary support, and the European Central Bank may face increased pressure to carry its easing cycle into the second-half of the year as the fundamental outlook for the region turns increasingly bleak. As the economic docket for the following week is expected to show the euro-area contracting 0.2% in the first-quarter, a dismal growth report is likely to fuel speculation for additional monetary support, and we should see the bearish formation in the EURUSD continue to take shape as the pair struggles to get back above former support around 1.3000. In turn, we should see the Euro continue to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50, but we will keep a close eye on the relative strength index as it approaches oversold territory.

British Pound: BoE To SoundIncreasingly Hawkish Despite Growth Concerns

The British Pound continued to give back theadvance from the previous month, with the GBPUSD slipping to afresh monthly low of 1.6061, but we may see the sterling regain itsfooting next week should the Bank of England strike a hawkish tonefor monetary policy. Indeed, the quarterly inflation reporthighlights the biggest event risk for the sterling, and we may seethe central bank lay out a tentative exit strategy as thestickiness in underlying price growth raises the risk forinflation. However, there’s speculation that the BoE willcurb its growth forecast as the region slips back into recession,and we may see the central bank endorse its wait-and-see approachfor the second-half of the year as the ongoing turmoil in theeuro-area – the U.K.’s largest trading partner –continues to pose a risk for the region. As the short-termcorrection in the GBPUSD gathers pace, we may see the RSI struggleto maintain the upward trend from earlier this year, but we shouldsee former support around 1.6000 act as new resistance as the paircontinues to carve a series of higher highs paired with higherlows.

U.S. Dollar: U. of Michigan OnTap, Sticky Core CPI To Spur Hawkish Remarks

The greenback extended the advance from earlier thisweek , with the Dow Jones-FXCM U.S. Dollar Index(Ticker: USDOLLAR ) advancing to a fresh monthly high of 10,014,and the reserve currency looks poised to track higher in the comingdays as it maintains the upward trend from the beginning of May. Asmarket participants scale back their appetite for risk, a downturnin the U. of Michigan Confidence survey could fuel the flight tosafety, and the greenback may track higher throughout the remainderof the day as it benefits from safe-haven flows. Although theeconomic docket for the following week is expected to show theheadline reading for inflation falling back to 2.4% from 2.7% inApril, the stickiness in the core CPI may encourage the Fed toadopt a hawkish tone for monetary policy, and we should see thedollar track higher throughout 2012 as the central bank moves awayfrom its easing cycle.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:55

9:55

U. of Michigan Confidence (MAY P)

76.0

76.4
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/05/11/Euro_Weighed_By_Spain_Sterling_Outlook_Hinges_On_Inflation_Report.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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