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Euro Continues To Search For Support, Sterling Still Eyeing 1.5600

By , Currency Analyst
25 May 2012 14:20 GMT

Talking Points

  • Euro: Continues To Search For Support, ECB Says Policy Has Reached Limit
  • British Pound: Remains Oversold, BoE Under Pressure For More Easing
  • U.S. Dollar: Index Continues To Hit Fresh Highs, RSI Holds In Overbought Territory

Euro: Continues To Search For Support, ECB Says Policy Has Reached Limit

The EURUSD slipped to a fresh yearly low of 1.2495 amid the weakening outlook for Europe, and the pair may continue to search for support in the week ahead as European policy makers make an attempt to buy more time. It seems as though hopes for a euro-area bond are starting to fizzle amid the ongoing rift within the EU, and fears surrounding the European banking system may put additional pressure on the European Central Bank to expand its balance sheet further as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

In response, ECB board member Jens Weidmann argued that the central bank ‘reached the limit of our mandate’ amid the marked expansion in the balance sheet, and went onto say that the non-standard measures ‘have helped save time but don’t solve the structural causes of this crisis’ according to an interview with the Le Monde newspaper. As ECB President Mario Draghi maintains a neutral tone for monetary policy, it seems as though the Governing Council will preserve its current policy in June, but the central bank may have little choice but to increase its efforts to stimulate the economy as the region continues to face a risk for a prolonged recession. Although the EURUSD remains oversold, we may see the exchange rate weaken further as the downward trend in the relative strength index appears to be gathering pace. In turn, the single currency should continue to give back the rebound from 2010, and we will continue to look for fresh yearly lows in the EURUSD until the oscillator pushes back above 70.

British Pound: Remains Oversold, BoE Under Pressure For More Easing

The British Pound was little changed on Friday, with the GBPUSD holding within Thursday’s range, but the sterling may additional headwinds in the days ahead as market participants see the Bank of England carrying its easing cycle into the second-half of the year. In response, former Monetary Policy Committee member DeAnne Julius argued that lower borrowing costs in the U.K. ‘might have a short-lived announcement effect’ according to an interview with the Financial Times, and said that expanding the scope of the Asset Purchase Facility to include private-sector debt is more ‘sensible’ to shore up the ailing economy as it reduces the reliance for bank financing. As the BoE comes under increased pressure to ease policy further, we may see a growing split within the MPC, and the central bank may sound increasingly dovish going into the second-half of the year as it sees a renewed risk of undershooting the 2% target for inflation. As the relative strength index on the GBPUSD dips into oversold territory, we may see the pound-dollar continue to give back the advance from earlier this year, and we will wait for the RSI to push back above 30 to see a short-term correction take shape. Until then, we may see the pair make another run at 1.5600 as currency traders scale back their appetite for risk, but the economic development on tap for the following week may increase the appeal of the sterling as the economic recovery in the U.K. gradually gathers pace.

U.S. Dollar: Index Continues To Hit Fresh Highs, RSI Holds In Overbought Territory

The greenback remains largely mixed on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) coming off of a fresh 2012 high (10,225), and the reserve currency may continue to consolidate throughout the North American trade as market participation thins ahead of the holiday weekend. Indeed, the rally in the greenback continues to defy market expectations as the RSI on the dollar index remains in overbought territory, but the reserve currency may track higher in the coming days as the ongoing improvement in the world’s largest economy dampens expectations for more easing. Although the preliminary GDP report is expected to show a slower rate of growth during the first-quarter, the U.S. Non-Farm Payrolls report certainly highlights the biggest event risk for the following week as we’re expecting to see a 150K rise in employment.

--- 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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25 May 2012 14:20 GMT