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Euro Remains Bearish Ahead of ECB- Pound Consolidation Ahead

By , Currency Analyst
03 April 2013 12:40 GMT

Talking Points

  • Euro: IMF to Contribute EUR 1B to Cyprus, All Eyes on ECB
  • British Pound: BoE to Preserve Current Policy, Broad Range Ahead
  • U.S. Dollar: ADP Employment Disappoints, ISM Non-Manufacturing on Tap

Euro: IMF to Contribute EUR 1B to Cyprus, All Eyes on ECB

The Euro bounced back from an overnight low of 1.2788 as the headline reading for euro-area inflation grew an annualized 1.7% in March amid forecasts for a 1.6% print, while the International Monetary Fund (IMF) announced it would contribute about EUR 1B to the EUR 10B bailout for Cyprus.

In response, Cyprus Finance Minister Haris Georgiades pledged to implement the deal ‘fully and withoutderogations,’ and will seek a ‘swift ratification’ of the rescue package as the banking crisis renews the threat for contagion.

As European policy makers scramble to nail out the details of the Cyprus bailout, the German Finance Ministry anticipates a more detailed draft by April 9, but the rebound in the single currency may be short-lived should the European Central Bank (ECB) adopt a more dovish tone for monetary policy.

Although the Governing Council is widely expected to keep the benchmark interest rate at 0.75%, President Mario Draghi may sound more cautious this time around as the ongoing turmoil in the periphery countries raises the risk for a prolonged recession. As the economic downturn threatens price stability, we may see a growing number of ECB officials show a greater willingness to push the interest rate to a fresh record-low, and the central bank may continue to carry out its easing cycle over the coming months in an effort to steer the region out of recession.

As the EURUSD continues to hold below the 200-Day SMA (1.2880), we should see the pair preserve the range-bound price action carried over from the previous week, but the euro-dollar may continue to give back the rebound from November (1.2659) should the ECB turn increasingly pessimistic towards the real economy.

British Pound: BoE to Preserve Current Policy, Broad Range Ahead

The British Pound is regaining its footing on Tuesday, with the GBPUSD climbing back from a low of 1.5074, and the sterling may trade within a broad range over the near to medium-term as market participants weigh the outlook for monetary policy.

As the Bank of England (BoE) is widely expected to maintain its current policy, we should see the Monetary Policy Committee refrain from releasing a policy statement once again, and the meeting minutes due out on April 17 may show another 6-3 split as above-target inflation in the U.K. limits the central bank’s scope to expand the balance sheet further.

As the GBPUSD remains capped by the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260, we may see the 61.8% retracement (1.4850) provide support, and the pair may track sideways over the coming months as the BoE sticks to the sidelines.

U.S. Dollar: ADP Employment Disappoints, ISM Non-Manufacturing on Tap

The greenback is giving back the rebound from earlier this week, Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,428, and the reserve currency may face additional headwinds during the North American trade as the economic docket is expected to show a slowing recovery in the U.S.

Indeed, the ADP Employment report fell short of market expectations as private payrolls increased 158K in March amid forecasts for a 200K print, while the ISM Non-Manufacturing report is expected to show service-based activity expanding at a slower pace as the gauge is projected to fall back to 55.5 from 56.0 during the same period.

In turn, we may see the greenback continue to consolidate ahead of Friday’s Non-Farm Payrolls report, but the fresh batch of comments from Fed policy makers may prop up the greenback should we see a growing number of central bank officials scale back their willingness to expand the balance sheet further.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

ISM Non-Manufacturing Composite (MAR)

55.5

56.0

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAR 29)

2050K

3256K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAR 29)

-1100K

-4513K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAR 29)

-1000K

-1596K

USD

19:30

15:30

Fed's John Williams Speaks on Monetary Policy

USD

21:00

17:00

Fed's James Bullard Speaks on U.S. Economy

AUD

22:30

18:30

AiG Performance of Service Index (MAR)

48.5

--- 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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03 April 2013 12:40 GMT