DailyFX | May 16 2012 9:35 EDT
The British Pound struggled to hold its ground on Wednesday as the Bank of England struck a dovish tone for monetary policy, and the GBPUSD may continue to consolidate over the remainder of the week as it fails to maintain the upward trend from earlier this year.
British Pound: BoE Curbs Growth, Inflation Forecast – 1.5800 In Sight
The British Pound tumbled to a fresh monthly low of 1.5888 as the Bank of England kept the door open to expand monetary policy further, and the sterling may face additional headwinds over the near-term as the spillover effects from the sovereign debt crisis dampens the outlook for the region. Indeed, the BoE curbed its growth forecast and saw a risk of undershooting the 2% target on the back of subdued wage growth, but went onto say that the ‘big picture’ has not changed from February as policy makers expect to see a gradual recovery in Britain.
At the same time, the central bank warned of a disorderly outcome in the euro-area as the governments operating under the single-currency struggle to meet on common ground, and it seems as though the Monetary Policy Committee will carry its wait-and-see approach into the second-half of the year in an effort to shield the U.K. economy. Nevertheless, the BoE continued to highlight the stickiness in price growth as they see inflation staying above target through 2013, and it may become increasingly difficult for the central bank to defend its stance as underlying price pressures resurface. As the GBPUSD fails to maintain the upward trending channel from earlier this year, we expect to see a test of the 1.5800 figure for support, and the pair may trade sideways ahead of the BoE Minutes due out next week as market participants weigh the prospects for monetary policy.
Euro: Eyes 23.6% Fib For Support, IMF Strikes Cautious Tone For Italy
The Euro snapped back from an overnight low of 1.2680 amid the rebound in risk sentiment, but the single currency may face additional headwinds going into the end of the week as heightening finance costs across the region raise the risk for contagion. Indeed, the yield tied to Italy’s 10-Year debt breached 6% while the 10-year spread between Spain and German bonds widened to 500bp for the first time since November, and the ongoing turmoil in the region continues to cast a bearish outlook for the EURUSD as European policy makers struggle to restore investor confidence. In response, the International Monetary Fund argued that ‘a lot remains to be done’ in Italy as the group sees the region contracting in 2012, and the European Central Bank may come under increased pressure to expand monetary policy further as the region continues to face a risk for a prolonged recession. As we expect the ECB to carry its easing cycle into the second-half of the year, we will preserve our bearish outlook for the EURUSD, but the pair looks poised for a short-term correction as the recent decline remains oversold. As the euro-dollar comes up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may see the figure provide interim support, but we will need to see the relative strength index cross back above 30 to see a meaningful rebound in the exchange rate.
More to Follow...
--- Written by David Song, Currency Analyst
To contact David, e-mail firstname.lastname@example.org. 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 email@example.com.
Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum
Related Articles: Weekly Currency Trading Forecast
DOE U.S. Crude Oil Inventories (MAY 11)
DOE U.S. Gasoline Inventories (MAY 11)
DOE U.S. Distillate Inventory (MAY 11)
Fed's James Bullard Speaks on U.S. Economy
Federal Open Market Committee Meeting Minutes
ANZ Job Ads (MoM) (APR)
Producer Prices- Inputs (QoQ) (1Q)
Producer Prices- Outputs (QoQ) (1Q)