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Euro Holds Lower Top Going Into April, Pound Breaks Out Ahead Of BoE

By , Currency Analyst
30 March 2012 14:50 GMT

Talking Points

  • Euro: EU Caps Firewall at EUR 800B, All Eyes On ECB
  • British Pound: Breaks Out Of Range, BoE Rate Decision On Tap
  • U.S. Dollar: To Maintain Trend As Fed Continues To Soften Dovish Rhetoric

Euro: EU Caps Firewall at EUR 800B, All Eyes On ECB

The EURUSD rallied to an overnight high of 1.3375 as the EU ramped up the bailout fund to EUR 800B, but the single currency is likely to face additional headwinds in April as the fundamental developments coming out of the euro-area continues to fall short of market expectations. Indeed, there was speculation that the group would set the cap at EUR 940B amid the untapped EUR 240B in the European Financial Stability Facility, but it seems as though the governments operating under the single currency are becoming increasingly reliant on monetary support as they soften their approach in addressing the debt crisis.

Meanwhile, former European Central Bank board member Juergen Stark, who resigned over the bond-purchasing program, said he did not expect to see so many demands for the Long Term Refinancing Operations, and held a cautious tone about the quality of collateral accepted by the ECB as the ballooning balance sheet comes under scrutiny. However, as the Euro Zone continues to face a risk for a prolonged recession, we are likely to see the Governing Council take additional steps to shore up the ailing economy, and the EURUSD looks poised to track lower in the month ahead as it carves out a lower top this week. As the euro-dollar fails to push back above 1.3400, we should see the exchange rate consolidate in the days ahead, and the pair may revert back the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 to test for near-term support. However, as the data coming out of Europe continues to disappoint, a slew of dismal developments could spark a sharp selloff in the exchange rate, and we may see the EURUSD threaten 1.3000 over the near-term as European policy makers struggle to restore investor confidence. At the same time, market participants may show a muted reaction to the ECB rate decision as the central bank is widely expected to preserve a wait-and-see approach, and we may see President Mario Draghi strike a balanced tone for the region as policy makers continue to monitor the impact of the second LTRO.

British Pound: Breaks Out Of Range, BoE Rate Decision On Tap

The British Pound broke out of its range as the GBPUSD rallied to a fresh yearly high of 1.6036, and the exchange rate may continue to push higher in April should the Bank of England continue to soften its dovish tone for monetary policy. As the BoE is widely expected to maintain its current policy next week, we should see the Monetary Policy Committee refrain from releasing a statement on Thursday, but the meeting minutes may reveal a shift in the policy outlook as central bank officials anticipate to see a more robust recovery this year. In turn, we may see the GBPUSD make another run at the 23.6% Fib from the 2009 low to high around 1.6250, but the MPC may keep the door open to expand its balance sheet further as the recession in the euro-area threatens the economic recovery in the U.K.

U.S. Dollar: To Maintain Trend AsFed Continues To Soften Dovish Rhetoric

The greenback lost ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 9,908, but the recent weakness is likely to be short-lived as the Federal Reserve continues to soften its dovish tone for monetary policy. Richmond Fed President Jeffery Lacker, who also serves on the FOMC this year, talked down speculation for additional monetary support, stating that there is no ‘rationale for further easing,’ and we may see the central bank conclude its easing cycle in 2012 as the economic recovery gets on a more sustainable path. In turn, we should see the USDOLLAR maintain the upward trend from earlier this year, and we will be looking for additional dollar strength in April as speculation for another round of quantitative easing dissipate.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:45

9:45

Chicago Purchasing Manager (MAR)

63.0

64.0

USD

13:55

9:55

U. of Michigan Confidence (MAR F)

74.8

74.3

USD

14:00

10:00

NAPM-Milwaukee (MAR)

58.0

58.6

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30 March 2012 14:50 GMT