The larger-than-expected rise in European retail sales pushed the EUR/USD to an overnight high of 1.4343, but the rebound in the exchange rate could be short-lived as fears surrounding the sovereign debt crisis continue to bear down on market sentiment. As the EU struggles to contain the risk for contagion, there’s speculation that the group may take additional steps to calm market fears after Italian Finance Minister Giulio Tremonti met with Euro-Group President Jean-Claude Juncker earlier today, and we may see the European Central Bank soften its hawkish tone for monetary policy as record-high financing costs dampens the outlook for future growth.
According to Credit Suisse overnight index swaps, market participants see a zero percent chance for a 25bp rate hike at the rate decision scheduled for Thursday, and the ECB may see scope to keep the benchmark interest rate at 1.50% for the remainder of the year as the region appears to be facing a slowing recovery. Should central bank President Jean-Claude Trichet talk down the risk for inflation and strike a balanced tone for the region, we could see a resumption of the near-term reversal from 1.4534, and the EUR/USD may threaten the rebound from 1.3836 as interest rate expectations falter.
The Swiss Franc weakened across the board after the Swiss National Bank unexpectedly lowered its benchmark interest rate ‘as close to zero as possible,’ and the central bank may step up its efforts to stem the marked appreciation in the local currency as it weighs on the real economy. Indeed, the move suggests that we will see the SNB intervene in the currency market to balance the risks for the region, but the central bank may struggle to stem the bullish sentiment underlying the Franc as investors look for an alternative to the reserve currency. As the USD/CHF bounces back from a record-low of 0.7608, there appears to be a near-term correction in the exchange rate, but we would need to see the relative strength index cross back above 30 to see the rebound gather pace in the days ahead. The British Pound extended the rebound from the previous day and the GBP/USD looks poised to trend sideways over the near-term as investors weigh the outlook for future policy. Although the Bank of England is scheduled to announce its interest rate decision tomorrow, we are likely to see the central bank refrain from releasing a policy statement as the MPC upholds its current policy, and market participants will certainly keep a close eye on the meeting minutes, which are due out on August 17. As the U.K. faces a slowing recover, we could see a growing shift within the committee, and a growing number of the board may see scope to expand the asset purchase program beyond the GBP 200B target as policy makers see a risk of undershooting the 2% target for inflation. In turn, the sterling remains at risk of facing additional headwinds in the weeks ahead, and the GBP/USD may give back the rebound from 1.5781 as the central bank continues to defy calls to start normalizing monetary po