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A Eurozone Quandary to Be Settled Soon

By Kathy Lien
22 July 2013 22:43 GMT

The ECB’s lingering concerns about slow economic growth are likely to be either validated or called into question this week with the release of new PMI data and the German IFO survey.

Of all the major currencies, the euro (EUR) will be the central focus this week. With Eurozone manufacturing and service sector PMI reports scheduled for release along with the German IFO index, all eyes are on the performance of the region’s economy.

When we last heard from the European Central Bank (ECB) earlier this month, policymakers were concerned about the outlook for the region. ECB President Mario Draghi said that monetary policy will remain accommodative for as long as needed because there are downside risks to the economic outlook. He even talked about how the Bank is "technically ready" for negative rates.

Most of the economic reports received since have validated Draghi's concerns, but this week, economists are looking for an improvement in economic activity and German business confidence. As a result, the question now is whether the ECB's doubts about Eurozone growth are misplaced because economists are looking for stronger activity.

We believe that the risk is to the downside for Eurozone data because industrial production, factory orders, and investor confidence have all weakened, and unemployment in the region remains very high.

At the same time, though, despite his dovish comments last week, Fed Chairman Ben Bernanke confirmed that the Federal Reserve is looking to taper asset purchases, and the prospects for higher US yields should cap gains in the EURUSD.

Portugal Dodges Need for Early Elections

Meanwhile, Portugal's coalition parties and main opposition party failed to reach an agreement, but according to President Anibal Cavaco Silva, the current government has enough of a majority to avoid early elections.

Holding elections before 2015 would have created renewed political uncertainty for the country, the Eurozone, and the shared currency, so this was an ideal scenario for both Portugal and the euro.

See related: 3 FX Events the World Is Watching

No Eurozone economic reports were released on Monday, and Tuesday should be quiet as well with only French business confidence and production indicators on the economic calendar.

British Pound (GBP) Extends Gains

The British pound (GBP) extended its gains against the US dollar on Monday, moving higher for the fifth consecutive trading day. While no UK economic reports were released, the currency continued to benefit from last week's Bank of England (BoE) meeting minutes, in which all nine BoE policymakers voted to leave the size of the asset-purchase program and interest rates unchanged.

Of course, this is a precursor to a potentially larger change in monetary policy. According to UK Prime Minister David Cameron, who spoke this weekend, while the conservatives cannot guarantee that taxes will not be raised after the next election, if the economy improves, he wants to consider a reduction in taxes.

The British Bankers Association is set to release its monthly report on house purchases on Tuesday. The number of homes sold has been climbing gradually since March and is expected to increase further in June. Low interest rates have been extremely supportive of the UK housing market, and aside from GBPUSD, the pound is also performing well against the euro.

By Kathy Lien of BK Asset Management

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22 July 2013 22:43 GMT