DailyFX | April 16 2012 9:00 EDT
Heightening finance costs across euro-area dragged on market sentiment during the overnight trade, and the shift away from risk-taking behavior may gather pace during the North American session as European policy makers struggle to restore investor confidence.
Euro: Slips Below 1.3000 As Borrowing Costs In Spain Top Pre-LTRO Levels
The Euro slipped to a fresh monthly low of 1.2994 as the yield tied to Spain’s 10-Year debt climbed to the highest level since the European Central Bank conducted its first Long-Term Refinancing Operation in December, and we should see the Governing Council take additional steps to shore up the ailing economy as the governments operating under the single currency become increasingly reliant on monetary support. Indeed, European policy makers are looking to broaden the powers of the ECB as the sovereign debt crisis continues to drag on the real economy and President Mario Draghi may have little choice but to expand the balance sheet further as the EU argues against strengthen the bailout funds for the region.
As the LTRO’s appear to be having a limited impact, European Union Economic and Monetary Affairs Commissioner Olli Rehn called for ‘significant restructuring efforts’ across the commercial banks in Europe, but we may see financial institutions continue to horde cash as the heightening risk for contagion continues to dampen the fundamental outlook for the region. As the descending triangle in the EURUSD continues to take shape, the pair appears to have carved out a lower top 1.3200, and the bearish formation may generate a sharp selloff in the exchange rate as price action approaches the apex. Nevertheless, we are waiting for a close below 1.3000 to see the downward momentum gather pace, and we expect the pair to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as it struggles to maintain the advance from earlier this year.
British Pound: Threatens Upward Trend, Range-Bound Price Ahead
The British Pound pared the overnight decline to 1.5818 to maintain the range-bound price action from earlier this month, and the pair appears to be building a short-term base to make another run at 1.6000. As the GBPUSD struggles to maintain the upward trending channel from earlier this year, we may see the pair track sideways over the near-term, but the Bank of England Minutes may instill a bullish outlook for the sterling should the central bank continue to soften its dovish tone for monetary policy. Although board members David Miles and Adam Posen are expected to vote for another GBP 25B in quantitative easing, the majority of the Monetary Policy Committee may strike an improved outlook for the region, and the central bank may endorse a wait-and-see approach throughout 2012 as BoE officials anticipate to see a stronger recovery later this year. In turn, we may see the GBPUSD hold steady ahead of the BoE Minutes, but the fresh batch of central bank rhetoric should heavily influence the British Pound as market participants weigh the prospects for future policy.
More to Follow...
--- Written by David Song, Currency Analyst
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