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Forex: Euro Hit By Debt Fears, U.S. Dollar Reversal To Accelerate

By , Currency Analyst
08 March 2011 13:30 GMT

Talking Points

  • British Pound: Tests Trendline Ahead Of BoE
  • Euro: Greece Yields Hit Highest Since 1999
  • U.S. Dollar: IBD/TIPP Economic Optimism On Tap

The Euro continued to pare the advance from the previous week, with the EUR/USD slipping to a low of 1.3889 on Tuesday, and the single-currency may face additional headwinds ahead of the EU Summit later this week as the sovereign debt crisis deepens. Greece’s 10-Year yield climbed to 12.77% during the overnight, which was the highest since the euro was introduced in 1999, and the governments operating under the fixed-exchange rate system may continue to face higher borrowing costs as the risk for contagion intensifies. As European policy makers maintain a relaxed approach in address the debt crisis, market participants speculate Portugal to share Ireland’s ill fate, and the uncertainties surrounding the real economy certainly hampers the outlook for the euro as the region faces an uneven recovery.

Indeed, currency traders showed little reaction to the hawkish comments from the European Central Bank even as board member Axel Weber encouraged the Governing Council to establish an exit strategy over the coming months, and the Governing Council certainly faces an uphill battle as it aims to balance the risks for the region. As the European debt crisis comes into focus, the small correction in the EUR/USD may gather pace going into the middle of the week, and the exchange rate may work its way back towards the 20-Day SMA (1.3728) as the relative strength index falls back from overbought territory. However, as the ECB shows an increased willingness to normalize monetary policy in the first-half of 2011, speculation for higher borrowing costs may help to prop up the single-currency, and the exchange rate may trade within a broad range over the near-term as investors weigh the outlook for future policy.

The British Pound slipped to a fresh monthly low of 1.6141, but the sterling may regain its footing going into the middle of the week as the Bank of England is widely expected to maintain its current policy in March. According to Credit Suisse overnight index swaps, investors see the BoE raising the benchmark interest rate by 75bp over the next 12-months, and hawkish comments from the central bank is likely to spark a bullish reaction in the British Pound as rate expectations gather pace. However, the central bank may refrain from releasing a policy statement as it keeps monetary policy unchanged, and the BoE Minutes due out on March 23 is likely to set the tone for future price action given the growing shift within the MPC. As the GBP/USD tests the upward trendline from earlier this year for near-term support, there could be a small rebound in the exchange rate during the North American trade, but the sterling may struggle to hold its ground as investors scale back their appetite for risk.

The U.S. dollar bounced back against most of its major counterparts following a flight to safety, and the greenback may continue to appreciate throughout the North American trade as the political turmoil in the Middle East paired with the European debt crisis continues to bear down on market sentiment. As the economic docket remains fairly light for Tuesday, risk trends are likely to dictate price action for the major currencies, and the rebound in the reserve currency may gather pace going forward as the uncertainties surrounding the global economy intensifies.

Will the EUR/USD Continue to Retrace the Decline From November? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

15:00

10:00

IBD/TIPP Economic Optimism (MAR)

51.7

50.9

Currency

GMT

Release

Expected

Actual

Comments

NZD

12:45

Value of All Building(4Q)

--

1.1%

Increased for the third time in 2010.

NZD

23:00

QV House Prices (YoY) (FEB)

--

-1.7%

Contracts for third month.

JPY

23:50

Trade Balance – BOP Basis (yen) JAN

371.8B

394.5B

Posts the first trade deficit since January 2009. Current account surplus lowest since May.

JPY

23:50

Adjusted Current Account Total (yen) (FEB)

1167.0B

1089.2B

JPY

23:50

Current Account Balance (Yoy) JAN

-47.6%

-47.6%

JPY

23:50

Current Account Total (yen) JAN

470.0B

461.9B

JPY

23:50

Bank Lending Banks Adjustments (YoY) (FEB)

--

-1.7%

Lending contracts for 15 consecutive months.

JPY

23:50

Bank Lending Banks Ex-Trust (FEB)

-1.8%

-2.0%

JPY

23:50

Bank Lending inc. Trusts (YoY) (FEB)

--

-1.8%

JPY

23:50

Japan Money Stock M2+CD (YoY) (FEB)

2.3%

2.4%

Rises at the fastest pace in three-months.

JPY

23:50

Japan Money Stock M3 (YoY) (FEB)

1.8%

1.8%

GBP

00:01

BRC Sales (FEB)

0.7%

-0.4%

Weakens for the first time in 2011.

GBP

00:01

RICS House Price Balance (FEB)

-26%

-26%

Slowest pace of contraction since July.

AUD

00:30

NAB Business Conditions (FEB)

--

-2

Highest since March 2010.

AUD

00:30

NAB Business Confidence (FEB)

--

14

JPY

04:30

Bankruptcies (YoY) (FEB)

--

-9.4%

Fastest pace of decline since October.

JPY

05:00

Eco watchers Survey: Current (FEB)

--

48.4

Highest since July 2010.

JPY

05:00

Eco Watchers Survey: Outlook (FEB)

--

47.2

CHF

06:45

Unemployment Rate (FEB)

3.7%

3.6%

Weakens for the first time in three-months.

CHF

06:45

Unemployment Rate (s.a.) (FEB)

3.4%

3.4%

EUR

07:30

Bank of France Business Sentiment (FEB)

110

110

Holds steady for second month.

EUR

07:45

French Trade Balance (euros) JAN

-5.1B

-5.9B

Largest deficit since October 2008.

EUR

11:00

German Factory Orders (MoM) JAN

2.5%

2.9%

Led by an increase in domestic demands.

EUR

11:00

German Factory Orders (YoY) JAN

15.6%

16.0%

USD

12:30

NFIB Small Business Optimism (FEB)

95.0

94.5

Highest since December 2007.

CAD

13:15

Housing Starts (FEB)

172.8K

181.9K

Advances to a three-month high.

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08 March 2011 13:30 GMT