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Forex: Euro Outlook Remains Bearish, CAD To Gain On Rate Expectations

By , Currency Analyst
22 July 2011 13:15 GMT

Talking Points

  • Euro: Fitch Says Greece Faces ‘Restricted Default’
  • British Pound: 2Q GDP On Tap, Slower Growth Ahead
  • Canadian Dollar: Inflation Cools, Household Consumption improves
  • U.S. Dollar: Selloff Continues, Fed Chairman Bernanke On Tap

The Euro pared the sharp advance from the previous day, and the single-currency may struggle to hold its ground during the North American trade as the new bailout plan for Greece comes under increased scrutiny. Fitch Ratings said Greece faces a ‘restricted default’ as European policy makers seek private sector involvement to address the debt crisis, but went onto say that this could be a ‘window of opportunity’ for the region to gain solvency. At the same time, the Institute of International Finance warned that the largest banks in Europe face a EUR 20.6B write down in light of the second rescue package, and the relief rally in the euro looks as though it will be short-lived as European policy makers could be forced to take additional steps to stem the risk for contagion. Indeed, there’s speculation that the European Financial Stability Facility will need more than the EUR 440B allotted to carry out its new roles, and the euro could face additional headwinds in the second-half of the year as investor confidence remains battered. As the EUR/USD fails to break above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, we should see the descending triangle formation continue to pan out in the week ahead, and exchange rate may fall back towards the 61.8% Fib around 1.3880-1.3900.

The British Pound failed to hold the overnight advance to 1.6339 and the sterling may come under increased pressure in the following week as the economic docket is expected to show a slowing recovery in the U.K. As the preliminary GDP report is expected to show a 0.1% expansion in the second-quarter, the data could heighten the uncertainties surrounding the region, and the Bank of England may keep the door open to expand monetary policy further as growth and inflation taper off. As the BoE continues to defy calls to raise the benchmark interest rate off of the record-low, the looks as though it will continue to endorse a wait-and-see approach over the remainder of the year, and the sterling may trade heavy throughout the second-half of the year as interest rate expectations falter. In turn, the GBP/USD may consolidate in the days ahead, and the exchange rate may make another run at the January swing low (1.5750) as the region faces a protracted recovery.

The Canadian dollar lost ground on Friday and the rebound in the USD/CAD may gather pace heading into the following week as the recent developments coming out of the region dampens the prospects of seeing a rate hike later this year. Indeed, the slower rate of inflation may lead the Bank of Canada to retain its wait-and-see approach in the second-half of the year, but the ongoing improvements within the real economy may encourage the central bank to soften its dovish outlook for monetary policy as the recovery gathers pace. According to Credit Suisse overnight index swaps, market participants see borrowing costs in Canada increasing by more than 60bp over the next 12-months, and increased speculation for a rate hike should help to prop up the loonie as investors weigh the outlook for future policy. In turn, the USD/CAD may continue to move back towards the lower bounds of the downward trending channel carried over from 2009, and the exchange rate may threaten the rebound from back in May (0.9445) as the recovery in Canada outpaces growth in the world’s largest economy.

The U.S. dollar regained its footing on Friday and the reserve currency may continue to gain ground throughout the North American trade as market participants appear to be scaling back their appetite for yields. With equity futures foreshadowing a lower open for the U.S. market, the shift in market sentiment could spark increased demands for the greenback, and risk sentiment should dictate price action throughout the remainder of the week as the economic docket remains bare for the North American trade. Nevertheless, the 2Q GDP report for the world’s largest economy is likely to take center stage next week, and the data could set the tone for future price action as investors weigh the prospects for a sustainable recovery in the U.S.

Will the Descending Triangle in the EUR/USD Continue To Play Out? 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

EDT

Release

Expected

Prior

No Scheduled Releases

Currency

GMT

Release

Expected

Actual

Comments

AUD

1:30

Import Price Index (QoQ) (2Q)

-1.1%

0.8%

Rises for the second straight quarter.

AUD

1:30

Export Price Index (QoQ) (2Q)

4.5%

6.0%

JPY

5:00

Supermarket Sales (YoY) (JUN)

--

0.1%

First rise in three-months.

EUR

6:45

French Own-Company Production Outlook (JUL)

--

8

Slips to a two-month low.

EUR

6:45

French Production Outlook Indicator (JUL)

--

3

Weakens for third month.

EUR

6:45

French Business Confidence Indicator (JUL)

107

105

Lowest since December 2010.

EUR

8:00

German IFO - Expectations (JUL)

105.0

105.0

Lowest reading since October 2010.

EUR

8:00

German IFO - Business Climate (JUL)

113.7

112.9

EUR

8:00

German IFO - Current Assessment (JUL)

122.3

121.4

EUR

8:00

Italian Retail Sales s.a. (MoM) (MAY)

-0.1%

-0.1%

Declines for the third time this year.

EUR

8:00

Italian Retail Sales (YoY) (MAY)

--

-0.6%

EUR

9:00

Euro-Zone Industrial New Orders s.a. (MoM) (MAY)

0.8%

3.6%

Biggest rise since August 2010.

EUR

9:00

Euro-Zone Industrial New Orders (YoY) (MAY)

10.3%

15.5%

CAD

11:00

Consumer Price Index (MoM) (JUN)

-0.2%

-0.7%

Slowest pace of growth since February. Dampens prospects for BoC rate hike.

CAD

11:00

Consumer Price Index (YoY) (JUN)

3.5%

3.1%

CAD

11:00

Bank Canada CPI Core (MoM) (JUN)

0.0%

-0.6%

CAD

11:00

Bank Canada CPI Core (YoY) (JUN)

1.9%

1.3%

CAD

11:00

Consumer Price Index (JUN)

--

119.8

CAD

12:30

Retail Sales (MoM) (MAY)

-0.3%

0.1%

Increases for the second month.

CAD

12:30

Retail Sales Less Autos (MoM) (MAY)

0.4%

0.5%

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22 July 2011 13:15 GMT