Euro Continues To See Price Action Dictated By Sovereign Credit Downgrades

ECB Interest Rate Expectations

ECB interest rate expectations continue to slide as the region’s troubles continue to grow with Greece requesting IMF and E.U. aid. Portugal and Spain are also seeing their borrowing costs soar which has lowered growth expectations for the region. Any help for the countries will assuredly come with significant austerity measures and will force governments to cut spending even further. Growth in Germany has been impressive but it may not be enough to offset broader weakness. The upcoming German labor report is expected to show continued strength with the number of unemployed shrinking by 10,000. The potential for higher wages on the back of a stronger labor market could raise yield expectations which could help the Euro erase recent losses. Discuss this and trading ideas join the EUR/USD forum.

FOMC Interest Rate Expectations

The FOMC left their benchmark rate unchanged at 0.25% and remain committed to maintaining rate low for an “extended period”. Speculation had grown that policy maker’s would remove the dovish language as several members were rumored to push for the central bank to start selling assets. However, only Kansas City Fed President Hoeing objected to maintaining the statements in the language which most likely signals that a rate hike may not come until the end of the year at the earliest. Indeed, Fed Fund futures are pricing in only a 29.4% chance of a rate hike by September which may limit the potential for dollar strength. The upcoming first quarter GDP report is forecasted to show the economy grew by 3.4%. A better than expected print could raise the outlook for yields which could provide dollar support.

Risk

Equity markets have regained their footing after earlier weakness on the back of the S&P downgrade of Spain. The Fed pledging to keep rates low has reignited risk appetite and raised the outlook for corporate earnings. Better than expected earnings from Dow and Comcast added the slew of impressive results which continues to be a supporting factor for stocks. The Dow found trend line support which could limit further losses. A strong US GDP report could see stocks look to re-test recent highs. However, a break below the level could lead to an extended move lower which could weigh on the EUR/USD despite its diminishing correlation with risk. Discuss this and other fundamental data in the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com