Talking Points

• Euro: ECB to Boost Lending, Banks to Repay EUR 1.1B of LTRO

• British Pound: BoE Sees Limited Scope for More QE, Minutes in Focus

• U.S. Dollar: Index Hits Fresh High, U. of Michigan Confidence on Tap

Euro: ECB to Boost Lending, Banks to Repay EUR 1.1B of LTRO

The Euro slipped to 1.2830 as European Central Bank (ECB) board member Benoit Coeure reiterated that the Governing Council is ‘exploring options to further strengthen lending to the real economy and, in particular, to small and medium-sized enterprises,’ and it seems as though the central bank will continue to embark on its easing cycle over the coming months as the region struggles to return to growth.

At the same time, Governing Council member Joerg Asmussen warned some region in the euro-area may face a ‘decade of adjustment’ as European policy makers scale back their push for austerity, and went onto say that monetary policy will remain expansive as long as needed as the governments operating under the single currency become increasingly reliant on monetary support.

As commercial banks in the euro-area look to repay another EUR 1.1B of the Long-Term Refinancing Operations (LTRO), the weakening outlook for private sector lending may prompt the ECB to introduce more non-standard measures over the coming months, and we may see a growing number of central bank officials show a greater willingness to purchase Asset-Backed Securities (ABS) in an effort to steer the region out of recession. At the same time, negative interest rate may become a reality for the euro-area as the economic downturn threatens price stability, and the single currency remains poised to face additional headwinds over the near to medium-term as the outlook for growth and inflation remains bleak.

Indeed, we will look for further declines in the EURUSD as the head-and-shoulders pattern continues to play out, and we are still looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it searches for support.

British Pound: BoE Sees Limited Scope for More QE, Minutes in Focus

The British Pound struggled to hold its ground on Friday, with the GBPUSD tagging an overnight low of 1.5210, but the recent decline in the exchange rate is likely to be short-lived as the Bank of England (BoE) continues to scale back its willingness to expand the balance sheet further.

Indeed, BoE board member Marin Weale said there’s limited scope to expand the Asset Purchase Facility beyond the GBP 375B target as it presents a risk to inflation expectations, and we may see a growing number of Monetary Policy Committee officials adopt a more neutral to hawkish tone for monetary policy as the central bank sees a moderate and sustainable recovery in the U.K.

In turn, the BoE Minutes due out on May 22 may further dampen expectations for more quantitative, and we should see the sterling should continue to retrace the sharp decline from earlier this year amid the shift in the policy outlook.

U.S. Dollar: Index Hits Fresh High, U. of Michigan Confidence on Tap

The greenback continued to push higher on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to a fresh yearly high of 10,803, and the reserve currency may continue to gain ground throughout the North American trade as the economic docket is expected to reinforce an improved outlook for growth.

As the U. of Michigan Confidence survey is expected to increase to 77.9 in May, a sharp rebound in household sentiment may increase the appeal of the USD, and the bullish sentiment surrounding the greenback should gather pace as the fundamental developments coming out of the world’s largest economy dampens speculation for more Fed support.

FX Upcoming

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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