Talking Points
* Euro: EU Delays Payment For Greece, To Discuss New Resolution In July
* British Pound: Holds Narrow Range, All Eyes On BoE Minutes
* U.S. Dollar: Benefits From Safe-Haven Flows, Risk To Drive Price Action
The Euro struggled to hold its ground during the overnight trade and the EUR/USD may continue to retrace the rebound from the previous week as fears of a Greek default bears down on trader sentiment. Following a meeting in Luxembourg, the EU said it will announce a new strategy to help Greece finance its debt in July as policy makers pressure the region to adopt new laws that will cut the budget deficit. Adding to the statement, Euro Group President Jean-Claude Juncker argued that Greece will have ‘do what they promised,’ and went onto say that the group will hold another meeting on July 3 to assess whether or not the government has ‘fulfilled’ their obligations to receive the remainder bailout funds of the EUR 110B package.
At the same time, European Central Bank board member Lorenzo Bini Smaghi warned that Greek will not receive additional help unless the country passes further spending cuts, and saw a heightening risk for contagion should the region look to restructure its debt. Although the ECB talks up speculation for higher interest rates in Europe, the Governing Council may have little choice but to delay its exit strategy further, and the central bank may soften its hawkish tone at the next policy meeting on July 7 as the economic outlook remains clouded with high uncertainty. In turn, the EUR/USD may make another run at 1.4000 in the days ahead, and the pair looks poised to threaten the rebound from May (1.3969) as interest rate expectations falter. According to Credit Suisse overnight index swaps, investors see borrowing costs in Europe increasing by at least 25bp over the next 12-month, which compares with speculation for 75bp worth of rate hikes just earlier this month, and rate expectations could deteriorate further in the second-half of the year as
The British Pound bounced back from a low of 1.6108 to maintain the narrow range from the end of the previous week, and the exchange rate is likely to trend sideways ahead of the Bank of England meeting minutes due out on Wednesday as investors weigh the prospects for monetary policy. In light of the recent developments, we expect the BoE to strike a balanced tone for the region, and the central bank is likely to retain its current policy throughout the third quarter as growth and inflation cools. However, if central bank Governor Mervyn King talks down the risk for higher price growth, dovish comments are likely to spark a bearish reaction in the sterling, and the GBP/USD could make a run at 1.6000 as it threatens the rebound from March.
The U.S. dollar certainly gained ground against most of its major counterparts as currency traders scaled back their appetite for yields, and the greenback should continue to appreciate throughout the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for Monday, risk sentiment should continue to drive price action in the foreign exchange market, but European policy makers may take further steps to talk down the risks for region, which could spur a shift in risk-taking behavior.
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