Sterling was up versus the dollar but weaker in the crosses as the BOE meeting minutes showed a reluctance to tighten interest rates given weakness in UK growth prospects and headwinds in the global economy. Rising expectations for solutions to debt issues on both sides of the pond are spurring equity gains and dollar weakness, though the major currencies remain in their weekly ranges prior to tomorrow’s EU summit.
The dollar is weaker as market sentiment is improving. Prospects of a deal in the US debt talks are making headway as the Gang of six proposal may be enough to stitch together a short term solution while pushing the larger budgetary debates further down the road until after the 2012 election. Equities have continued to perform well after yesterday’s 1.6% rally in the Dow. European equities have followed US indices higher with the FTSE up 1% while gold is off of its all-time high.
A day before the European summit Sarozky and Merkel are meeting in Berlin to hash out their differences. Tomorrow’s meeting will likely address an additional Greek bailout package with involvement from the private sector, something Merkel has been adamant about. This is in stark contrast with the ECB which insists on any private sector participation avoiding a credit event as defined by the rating agencies. A substantial new package released following the EU summit would likely be supportive of the euro. One such package is rumored to allow the EFSF begin purchasing sovereign debt or loaning funds to Greece to buy back their own bonds. Any solution will need to be scalable to other EU nations to prevent further contagion as was seen the previous week with yields on Spanish and Italian debt climbing. Initial resistance for the EUR/USD remains last week’s high/100-day moving average near 1.4300.
Sterling is up versus the dollar but lower in the crosses as the BOE signaled the current economic weakness is expected to be prolonged and will prevent the central bank from raising UK interest rates in the near term. Despite expectations of increased headline inflation, wages are not putting upward pressure on prices and thus will allow the BOE to maintain its loose monetary policy going forward. This will likely keep sterling pressured versus the euro but dollar weakness could temper any losses in cable. EUR/GBP resistance is found at 0.8850 followed by the July 1st high of 0.9080. Cable has resistance at 1.6220 from the pattern forming since late April and support at last week’s lows of 1.5780, a level that coincides with a 38.2% Fib retracement of the April 2010 to April 2011 move.
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