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Forex: Euro Losses to Accelerate on Dovish ECB- Pound At Key Juncture

By , Currency Analyst
09 January 2013 14:05 GMT

Talking Points

  • Euro: German Growth To Stay Below 1.0%, All Eyes On ECB
  • British Pound: Slips To Fresh Monthly Low Ahead Of BoE
  • U.S. Dollar: Risk Sentiment To Drive Prices Amid Bare Economic Docket

Euro: German Growth To Stay Below 1.0%, All Eyes On ECB

The Euro slipped to an overnight low of 1.3042 even as EU Commissioner for Economic and Monetary Affairs Olli Rehn talked down the risk of a euro-area breakup, but Mr. Rehn did warn that the growth outlook remains the biggest concern as the region remains at risk for a prolonged recession.

Indeed, the BGA lobby group in Germany sees Europe’s largest economy to grow at ‘just below 1%’ this year as ‘important indicators such as labor costs and energy costs show that Germany is losing competitiveness,’ and we should see the European Central Bank (ECB) continue to embark on its easing cycle in 2013 as the ongoing weakness in the real economy threatens price stability.

Although the ECB is widely expected to keep the benchmark interest rate at 0.75%, a growing number of central bank officials may show a greater willingness to lower borrowing costs, and we may see President Mario Draghi strike a highly dovish tone for monetary policy as inflation is expected to fall below the 2% target this year.

As the EURUSD threatens the bullish trend carried over from July, we may see a move back below the 1.3000 should the ECB talk up bets for a rate cut, and the pair may make another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: Slips To Fresh Monthly Low Ahead Of BoE

The British Pound extended the decline from earlier this week and weakened to a fresh monthly low of 1.5995, but we may see the sterling regain its footing over the next 24-hours of trading as the Bank of England (BoE) brings its easing cycle to an end.

We anticipate the BoE to maintain its current policy in January as the U.K. emerges from the double dip recession, and we may see the Monetary Policy Committee adopt a more hawkish tone this time around as the central bank sees above-target inflation over the policy horizon. In turn, we may see a growing number of BoE officials start to discuss a tentative exit strategy, and the committee may see scope to lift the benchmark interest rate in the second-half of the year amid the stickiness in price growth.

Despite the recent weakness in the sterling, we’re seeing the GBPUSD preserve the upward trend from June, but we may scale back our bullish forecast for the British Pound should the pair close below the 1.6000 figure. Nevertheless, the shift in the policy outlook should help to prop up the GBPUSD over the near to medium-term, and we may see the pound-dollar move back towards the 1.6300 region should the BoE look to normalize monetary policy later this year.

U.S. Dollar: Risk Sentiment To Drive Prices Amid Bare Economic Docket

The greenback pared the weakness from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,104, but the reserve currency may come under pressure during the North American trade as there appears to be a pickup in market sentiment.

As the economic docket remains fairly light for the U.S. session, risk trends should dictate price action in the forex market, but the bullish sentiment surrounding the reserve currency may continue to gather pace in the days ahead as the Federal Reserve drops its dovish tone for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

NZD

21:45

16:45

Trade Balance (YTD) (NOV)

-1429M

-1367M

NZD

21:45

16:45

Trade Balance (NOV)

-670M

-718M

NZD

21:45

16:45

Exports (New Zealand dollars) (NOV)

3.55B

3.46B

NZD

21:45

16:45

Imports (New Zealand dollars) (NOV)

4.20B

4.18B

NZD

23:00

18:00

QV House Prices YoY% (DEC)

5.70%

JPY

23:50

18:50

Official Reserve Assets (DEC)

$1270.9B

NZD

00:00

19:00

ANZ Commodity Price (DEC)

1.00%

AUD

00:30

19:30

Building Approvals (YoY) (NOV)

11.60%

14.50%

AUD

00:30

19:30

Building Approvals (MoM) (NOV)

3.00%

-7.60%

CNY

02:00

21:00

Imports (YoY) (DEC)

3.50%

0.00%

CNY

02:00

21:00

Trade Balance (USD) (DEC)

$20.00B

$19.63B

CNY

02:00

21:00

Exports (YoY) (DEC)

5.00%

2.90%

--- 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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09 January 2013 14:05 GMT