Euro Continues To Threaten 1.2500

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Talking Points

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• Euro: Spain To Recapitalize Bankia With Debt, ECB Keeps Asset Purchases On Hold
  
• British Pound: BoE Drops Dovish Tone, Warns Of Sticky Price Growth
  
• U.S. Dollar: Benefits From Headline-Drive Market, Consumer Confidence Misses Forecasts
  

Euro: Spain To Recapitalize Bankia With Debt, ECB Keeps Asset Purchases On Hold

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The Euro pared the overnight advance to 1.2573 amid heightening finance costs across the European periphery sapped risk-taking behavior, while Italy sold EUR 8.5B in 6-month bills yielding 2.104%, which compares to the 1.772% offered in April. Meanwhile, Spanish Prime Minister Mariano Rajoy said the government will now recapitalize Bankia with treasury debt rather than cash as region’s third-largest lender seeks a EUR 19B bailout, but it seems as though that the European Central Bank will carry its wait-and-see approach into the second-half of the year even as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

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Indeed, ECB board member Ewald Nowotny talked down speculation for restoring the asset-purchase program, stating that the Governing Council ‘ has done a number of measures that were very helpful and efficient for the economy ,’ and went onto say that the ‘the role of the ECB is in the field of liquidity, not solvency ’ as the central bank continues to endorse its current policy stance. As European policy makers continue to carry out a reactionary approach in tackling the risks surrounding the region, fears of Spanish bailout paired with the growing threat of a Greek exit continues to foster a bearish outlook for the single currency, but the pair appears to be carving out a short-term floor around the 1.2500 figure as the relative strength index continues to come off of the lows. We are waiting to see the RSI cross back above 30 to see a short-term correction take shape, but the headline-driven market may ultimately produce a fairly muted rebound in the exchange rate as European policy makers struggle to restore investor confidence.

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British Pound: BoE Drops Dovish Tone, Warns Of Sticky Price Growth

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The British Pound gave back the advance to 1.5716 as market participant scaled back their appetite for risk, but we may see another bullish run in the GBPUSD as the Bank of England strikes a more hawkish tone for monetary policy. BoE board member Ben Broadbent curbed bets for more quantitative easing amid the stickiness in underlying inflation, while chief economist Spencer Dale said the central bank needs to get price growth back towards the 2% target as he expects to see a more robust recovery later this year. As the BoE moves away from its easing cycle, it seems as though the Monetary Policy Committee will start to discuss a tentative exit strategy to address the risk for inflation, and the GBPUSD should continue to come off of the monthly low (1.5629) as it appears to be carving out a higher low in May. In turn, we will keep a close eye on the RSI as it comes off of oversold territory, and the pound-dollar may carve out a higher high in June as the shift in central bank rhetoric props up interest rate expectations.

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U.S. Dollar: Benefits From Headline-Drive Market, Consumer Confidence Misses Forecasts

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The greenback bounced back on Tuesday , with the Dow Jones-FXCM U.S. Dollar Index (Ticker:

USDOLLAR ) advancing to an overnight high of 10,202, and it seems as the headline-driven market may continue to prop up the reserve currency as currency traders show a fairly muted reaction to the developments coming out of the world’s largest economy. Although the Conference Board’s Consumer Confidence survey missed market expectations, household sentiment continues to come off of the 2011 lows, and we should see the Federal Reserve soften its dovish tone for monetary policy as the recovery gradually gathers pace. In turn, we should see the FOMC move away from its easing cycle, and the Fed may look to address the stickiness in price growth as central bank officials see the economy on a more sustainable path.

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thestreet.com

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