Increased demands for Spanish debt propped up market sentiment on Tuesday, but the rebound in risk-taking behaviour may be short-lived as the weakening outlook for Europe continues to drag on investor confidence.
- Euro: Spain Debt Auction Exceeds Target, IMF Calls For ECB Rate Cut
- British Pound: Upward Trending Channel Remains Intact, Inflation Ticks Higher
Euro: Spain Debt Auction Exceeds Target, IMF Calls For ECB Rate Cut
The Euro climbed to an overnight high of 1.3171 as Spain sold EUR 3.18B in short-term bills, which exceeded the EUR 3.0B target, but heightening finance costs across the periphery countries continue to reinforce a bearish outlook for the single currency as European policy makers call for additional monetary support. However, the ECB may have little choice but to preserve its current policy amid the stickiness in price growth, and we may see a growing rift within the Governing Council as the fundamental outlook for the region remains clouded with high uncertainty.
Indeed, ECB board member Miguel Angel Fernandez Ordonez made an attempt to talk down the risk surrounding Spain and said that the region will not need a bailout, but saw little scope to push through another Long Term Refinancing Operation as the non-standard measure appears to be having a limited impact in addressing the risk for contagion. As the debt crisis raises the risk for a prolonged recession, the International Monetary Fund argued that the Governing Council should ‘lower its policy rate while continuing to use unconventional policies to address banks’ funding and liquidity problems,’ and we may see ECB officials show an increased willingness to target the benchmark interest rate as its ballooning balance sheet comes under scrutiny. As the EURUSD struggles to push back above the 50-Day SMA at 1.3208, we should see the bearish formation continue to pan out, and the pair looks poised for a break below 1.3000 as price action approaches the apex of the descending triangle.
British Pound: Upward Trending Channel Remains Intact, Inflation Ticks Higher
The British Pound extended the advance from earlier this week amid heightening price pressures in the U.K., and the stickiness in inflation may prompt the Bank of England to scale back its dovish tone for monetary policy as central bank officials anticipate to see a stronger recovery later this year. As the GBPUSD trades back within the upward trending channel from earlier this year, we will maintain our bullish outlook for the pair, and we may see the pound-dollar mark a 2012 high later this week should the BoE Minutes dampen speculation for more quantitative easing. As the GBPUSD carves out a higher low around 1.5800, the bullish momentum underlining the sterling should continue to gather pace over the near-term, and we may see the pound-dollar ultimately make a run at the 23.6% Fibonacci retracement from the 2009 low to high around 1.6250 as the central bank looks to conclude its easing cycle.
By David J. Song
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