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Euro May Fall on Evidence of ECB Dilution, Oil-Linked Growth Threat

By , Currency Strategist
28 March 2012 07:05 GMT

Talking Points

  • German CPI, Euro Zone Money Supply Data Likely to Surprise Higher
  • Euro May Fall on Evidence of Dilution, Growth Headwinds from Oil Spike
  • Australian, Canadian NZ Dollars Slump as Stocks Fall in Asian Trade

Eurozone monetary policy expectations take center stage today with German CPI and region-wide Money Supply reports headlining the calendar. Inflation is expected to slow in the currency bloc’s largest economy, printing at 2.2 percent in March after notching up a three-month high in February on the back of rising energy prices. Brent crude prices have added 2.5 percent so far this month and 11.7 percent from a year agoin EURterms, so there seems to be scope for an upside surprise.

Meanwhile, yearly M3 money supply growth rate is expected to slow to 2.4 percent in February but here too a print above consensus forecasts appears likely. There has been a strong relationship between the size of the ECB balance sheet and annualized M3 readings at least over the past five years. The sharp increase in the central bank’s asset holdings over recent months courtesy of its efforts at fighting the debt crisis (bond purchases, LTRO) ought to accelerate money supply growth, not slow it.

On balance, these outcomes appear unlikely to stoke ECB rate hike expectationsand may in fact weigh on the Euro. Indeed, a higher CPI reading that owes to oil supply fears rather than a pickup in economic activity may stoke fears that energy costs threaten to compound a recession likely already in progress in the region. Meanwhile, a jump in money supply growth would reinforce the notion that the ECB is diluting the single currency, arguing that it ought to fall in value in a similar way that the greenback weakened on the back of the Fed’s QE and QE2 programs.

The US Dollar (ticker: USDollar) posted a mixed performance against its major counterparts in overnight trade. The sentiment-linked Australian, Canadian and New Zealand Dollars fell while the safe-haven Japanese Yen outperformed as stocks fell in Asia. The MSCI Asia Pacific regional benchmark stock index shed 0.6 percent, following Wall Street lower as traders reconsidered buoyant QE3 expectations that emerged yesterday (as expected). European currencies corrected gently higher against the greenback following the selloff over the preceding 24 hours.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

No Data

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

5:30

EUR

French GDP (QoQ) (4Q F)

0.2%

0.2%

Medium

5:30

EUR

French GDP (YoY) (4Q F)

1.4%

1.4%

Medium

8:00

EUR

Euro-Zone M3 s.a. (3M) (FEB)

2.2%

2.0%

Low

8:00

EUR

Euro-Zone M3 s.a. (YoY) (FEB)

2.4%

2.5%

Medium

8:00

EUR

Italian Business Confidence (FEB)

91.5

91.5

Low

8:30

GBP

GDP (QoQ) (4Q F)

-0.2%

-0.2%

Medium

8:30

GBP

GDP (YoY) (4Q F)

0.7%

0.7%

Medium

8:30

GBP

Current Account (£) (4Q)

-8.4B

-15.2B

Low

8:30

GBP

Total Business Investment (QoQ) (4Q F)

-5.6%

-5.6%

Low

8:30

GBP

Total Business Investment (YoY) (4Q F)

-1.9%

-2.0%

Low

12:00

EUR

German CPI (MoM) (MAR P)

0.3%

0.7%

Medium

12:00

EUR

German CPI (YoY) (MAR P)

2.2%

2.3%

High

12:00

EUR

German CPI - EU Harmonised (MoM) (MAR P)

0.4%

0.9%

Medium

12:00

EUR

German CPI - EU Harmonised (YoY) (MAR P)

2.3%

2.5%

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3289

1.3410

GBPUSD

1.0000

1.5987

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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28 March 2012 07:05 GMT