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Forex Analysis: Euro Weighed By Growth Concerns- All Eyes On ECB

By , Currency Analyst
07 November 2012 14:30 GMT

Talking Points

  • Euro: EU Cuts Growth Forecast, ECB Sees ‘Very Low’ Inflation Risk
  • British Pound: To Consolidate Ahead Of BoE, 1.6200 In Sight
  • U.S. Dollar: Benefits From Risk Aversion, Consumer Credit On Tap

Euro: EU Cuts Growth Forecast, ECB Sees ‘Very Low’ Inflation Risk

The EURUSD tumbled to a fresh monthly low of 1.2735 as the EU warned of a deepening recession in the euro-area, and the pair may continue to give back the rebound from earlier this year as the fundamental outlook for the region turns increasingly bleak.

Indeed, the EU lowered its 2013 forecast as the group now sees the region growing 0.1% versus an initial forecast for a 1.0% rise, while Greece’s debt-to-GDP ratio is anticipated to exceed prior expectations as the debt crisis continues to drag on the real economy. In response, European Central Bank (ECB) President Mario Draghi warned that ‘the latest data suggest that these developments are now starting to affect the German economy,’ and struck a very dovish tone for monetary policy as the risk for inflation remains ‘very low over the medium term.’

Although the ECB is widely expected to maintain its current policy in November, we may see a growing number of central bank officials call for additional measures to shore up the ailing economy, and the Governing Council may now look to target the benchmark interest rate in an effort to combat the economic downturn in Europe.

As the double-top formation on the EURUSD continues to pan out, we may see the pair come up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 to test for interim support, but the euro-dollar may ultimately give back the rebound from 1.2041 as the ECB continues to embark on its easing cycle.

British Pound: To Consolidate Ahead Of BoE, 1.6200 In Sight

The British Pound continued to trade within the range-bound price action carried over from the previous month even as the EU lowered its fundamental assessment for the U.K., but the recent weakness in the sterling maybe short-lived as the Bank of England (BoE) appears to be softening its dovish outlook for monetary policy.

Indeed, forex traders may show a fairly muted reaction to the BoE rate decision should the group refrain from releasing a policy statement, but the meeting minutes may reveal a growing rift within the Monetary Policy Committee (MPC) as an increasing number of central bank officials see a diminishing risk of undershooting the 2% target for inflation.

As the U.K. emerges from the double-dip recession, we should see the BoE carry its wait-and-see approach into the following year, and the shift in the policy outlook should open the door for another test of the 1.6200 figure, the 23.6% Fib from the 2009 low to high.

U.S. Dollar: Benefits From Risk Aversion, Consumer Credit On Tap

The greenback appears to be regaining its footing on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) snapping back from an overnight low of 9,923, and the reserve currency may continue to track higher throughout the North American trade as it benefits from safe-haven flows.

As headlines coming out of Europe drags on risk-taking behavior, the drop in market sentiment should prop up the dollar over the remainder of the week, but we may see the reserve currency consolidate ahead of the ECB and BoE interest rate decisions as market participants weigh the outlook for monetary policy.

Nevertheless, as the economic docket is expected to show another $10.125B expansion in consumer credit, the ongoing improvement in private sector activity should dampen the Fed’s scope to ease policy further, and the bullish sentiment surrounding the U.S. dollar may gather pace over the near-term as the world’s largest economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

20:00

15:00

Consumer Credit

$10.125B

$18.123B

NZD

21:45

16:45

Unemployment Rate

6.7%

6.8%

NZD

21:45

16:45

Employment Change (QoQ)

0.3%

-0.1%

NZD

21:45

16:45

Employment Change (YoY)

0.8%

0.6%

NZD

21:45

16:45

Participation Rate (QoQ)

68.4%

68.4%

NZD

23:00

18:00

QV House Prices (YoY)

5.3%

--- 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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07 November 2012 14:30 GMT