Euro, British Pound Extend Decline Ahead of European Union Summit

Talking Points
•    Japanese Yen: Benefits From Risk Aversion
•    Pound: CBI Sees ‘Slow and Sluggish’ Recovery
•    Euro: IMF Stands Ready to Help Greece
•    U.S. Dollar: Chicago Fed Index, Treasury Secretary Geithner on Tap

Euro, British Pound Extend Decline Ahead of European Union Summit

 Meanwhile, International Monetary Fund First Managing Director John Lipsky said that the group stands ready and is “willing to be helpful in a way that the Greece authorities think is appropriate,” and went onto say that the IMF is “very much involved in a cooperative way” with the European Central Bank as the Governing Council aims to balance the risks for the economies operating under the fixed-exchange rate system.

As European policy makers fail to meet on common ground, with the Bundesbank continuing to voice its opposition to bailout Greece, the lack of decisive action could instill a weakened outlook for the region and weigh on the exchange rate as investors speculate the ECB to maintain a dovish outlook for future policy. As a result, the EUR/USD could test the lower bounds of its recent rate over the coming days as investors scale back expectations for a rate hike by the Governing Council, but the single-currency may continue to trend sideways throughout the week as the European Union is scheduled to hold a summit on March 25-26 in Brussels, Belgium.

The British Pound extended the decline from the previous week and slipped to a low of 1.4930 during the European session, and the GBP/USD is likely to maintain the downward trend from the January high (1.6456) as the Bank of England holds a cautious outlook for the region. Meanwhile, the Confederation of British Industry expects economic activity to expand 0.3% in the first three-months of 2010 and 0.4% in the second quarter, and forecasts GDP to increase 0.5% in the second-half of the year as the recovery remains “slow and sluggish.” At the same time, the group said that the “economic outlook is improving,” but argued that “signs of real strength” would not be apparent until the following year as households continue to face a weakening labor market paired with tightening credit conditions.

The greenback benefitted from the rise in risk aversion and strengthened against most of its major counterparts during the overnight session, and the reserve currency may continue to appreciate going into the North American trade as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the Chicago Fed National Activity index is scheduled to cross the wires at 12:30 GMT, and a positive reading could instill an enhanced outlook for future growth, which could stoke a shift in market sentiment, while Treasury Secretary Timothy Geithner is scheduled to speak on financial reform in front of the American Enterprise Institute at 20:30 GMT.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com