The Euro halted the three-day rally and slipped to a low of 1.2342 during the overnight trade as global policy makers agreed to tighten fiscal policy and balance their public finances at the G20 meeting over the weekend, and the single-currency may continue to trend lower going into the North American session as the austerity measures weigh on the outlook for future growth.
Talking Points
• Japanese Yen: Mostly Weaker Against the Majors
• Pound: Chancellor Osborne Looks To Extend Budget Cuts
• Euro: ECB Pushes For Global Reform
• U.S. Dollar: Personal Income, Spending on Tap
The G20 said that the “advances economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016,” but the group went onto say that global growth remains at the top of the agenda as the recovery in the world economy remains “uneven and fragile.”
At the same time, European Commission President Jose Barroso said that that the new measures were “widely welcomed” and saw no opposition to the plan as the spillover effects of the debt crisis weighs on the global financial system, and recommended that countries with a higher level of debt should begin to target the shortfall in 2011 as the outlook for future growth remains clouded with uncertainties. As the governments operating under the fixed-exchange rate system plan to withdraw support for the economy and pledge to scale back public spending, the European Central Bank is widely expected to maintain a loose policy stance in the second-half of the year as it aims to encourage a sustainable recovery. Meanwhile, ECB board member Gertrude Tumpel-Gugerell argued that an “important part of the regulatory reform is the need to reduce the moral hazard associated with systemically important financial institutions” during a speech in Brussels, and noted that global policy makers could introduce additional measures such as “capital surcharges or contingent capital instruments, liquidity surcharges, more intrusive supervision, and/or the introduction of bank levies.”
The British Pound bounced back from the low (1.5017) during the European trade to hold above the 100-Day SMA at 1.5036, and the exchange rate may hold steady throughout the day as the GBP/USD maintains the short-term rally from the May lows. Nevertheless, Chancellor of the Exchequer George Osborne said that the government may lower public handouts for the sick and disabled at the G20 summit as “some of these benefits individually are very much larger than most government departments,” and the new measures to reduce public spending could certainly weigh on the real economy as households continue to face tightening credit conditions paired with the deterioration in the labor market. As a result, the Bank of England is widely anticipated to maintain its currency policy at its meeting next month, but the stickiness in prices could lead to another split amongst the central bankers as the MPC maintains its dual mandate to ensure price stability while promoting future growth.
U.S. dollar price action was mixed during the overnight session, with the USD/JPY halting the four-day decline and rallying to a high of 89.45, and the reserve-currency is likely to face increased volatility going into the North American trade as the economic docket is expected to reinforce an improved outlook for the world’s largest economy. Person spending in the U.S. is forecasted to increase 0.1% in May after unexpectedly holding flat in the previous month, while private incomes are projected to expand 0.4% during the same period after rising 0.4% in April. However, the PCE Deflator, which acts as a gauge for inflation, is anticipated to fall back to an annualized pace of 1.8% in May from 2.0% in the month prior, and easing price pressures could lead the Federal Reserve to maintain a dovish outlook for future policy as it aims to encourage a sustainable recovery.
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Forex Weekly Trading Forecast - 06.28.10
To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
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