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Euro Optimism Fizzles Despite German Support, Continues To Carve Top

Talking Points

  • Euro: Germany Shows Greater Support For Bond Purchases
  • British Pound: BoE’s Weale Strikes Improved Tone, Eyes July High

Euro: Germany Shows Greater Support For Bond Purchases

The Euro advanced to 1.2380 as German Chancellor Angela Merkel endorsed the European Central Bank’s bond purchasing program, and it seems as though the Governing Council will have little choice but to carry out its easing cycle throughout the remainder of the year as Merkel pledges ‘to do everything’ to support the monetary union. As European policy increase their effort to alleviate heightening borrowing costs in Spain and Italy, a further expansion in the ECB’s balance sheet should provide some short-term relief, but the fundamental outlook for the region remains bleak as the debt crisis continues to drag on the real economy.

Indeed, there’s talk that Greece will ask for an extension to meet its budget target as the region faces a deepening recession, and it seems as though the Governing Council will implement a range of tools over the coming months as the governments operating under the single-currency struggle to get their house in order. As the EURUSD remains capped by the 50-Day SMA (1.2379), the near-term outlook for the pair remains bearish, and we would like to see a close below the 20-Day SMA (1.2281) for the euro-dollar to give back the rebound from July (1.2041).

British Pound: BoE’s Weale Strikes Improved Tone, Eyes July High

The British Pound pared the advance from earlier this week as market participants scaled back their appetite for risk, but the GBPUSD looks poised for a bullish breakout amid the series of higher highs paired with higher lows. Meanwhile, Bank of England board member Martin Weale struck an improved outlook for the U.K. and said that the region remains in a ‘sustained period of stagnation’ rather than a double-dip recession, and it seems as though the Monetary Policy Committee will continue to sit on the sidelines as the central bank anticipates the Funding for Lending program to boost private sector activity. As the GBPUSD finally puts in a close above the 200-Day SMA (1.5714), the pair looks poised to make a run at the July high (1.5766), and we may see the sterling continue to recoup the losses from earlier this year should the economic developments on tap for the following week encourage an improved outlook for the region.

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— Written by David Song, Currency Analyst

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