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Forex: Euro Battered By Moody’s Downgrade, British Pound Searches For Support

Forex: Euro Battered By Moody’s Downgrade, British Pound Searches For Support

2011-03-10 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: BoE Holds Rate At 0.50%, Asset Target At GBP 200B
  • Euro: Moody’s Holds Negative Outlook For Spain
  • U.S. Dollar: Monthly Budget Statement On Tap

The Euro slipped to a fresh weekly low of 1.3794 on Thursday as Moody’s Investor Services lowered Spain’s credit rating to Aa2 from Aa1, and the single-currency may face increased selling pressures during the North American trade as fears surrounding the sovereign debt crisis intensify. Moody’s held a negative outlook for Spain as the group expects the cost to restructure the region’s banking system to exceed the government’s projection, and showed an increased concern about the ‘high funding’ needs that the economy faces as policy makers struggle to manage public finances. At the same time, Fitch Ratings forecasts Spain’s financial sector to have a shortfall of EUR 38B in a ‘base-case stress scenario,’ but went onto say the region may need EUR 96.7B in a ‘more extreme stressed scenario.’

Meanwhile, comments from the European Central Bank failed to prop up the single-currency even as the Governing Council maintained a hawkish outlook for monetary policy in its monthly report, and the euro may face additional headwinds over the near-term given the heightening risk for contagion. In turn, the EUR/USD may continue to lose ground going into the end of the week, and the exchange rate may retrace the advance carried over from the previous month as it breaks out of the upward trend from earlier this year. As the relative strength index continues to fall back from overbought territory, the near-term correction in the exchange rate may gather pace over the following week, and the exchange rate may fall back towards 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, as it searches for support.

Nevertheless, currency traders showed a bearish reaction to the Bank of England interest rate decision as the central bank maintained its current policy in March, and the British Pound may continue to weaken throughout the North American trade as investors scale back their appetite for yields. The GBP/USD broke out of its upward trend from earlier this year as the exchange rate slipped to a fresh monthly low of 1.6063, and the pair may fall back towards the February low (1.5962) as it searches for support. However, with the BoE scheduled to release its policy meeting minutes on March 23, the downturn in the sterling could be short-lived given the growing shift within the MPC, and hawkish comments from the central bank should help to prop up local currency as investors expect the committee to gradually normalize monetary policy over the coming months.

The U.S. dollar rallied across the board during the overnight trade as fears surrounding the global economy weighed on market sentiment, and the rebound in the greenback may gather pace going into the end of the week as it benefits from the rise in safe-haven flows. However, as the U.S. monthly budget statement is expected to show a $225.2B shortfall in February, the swelling deficit is likely to dampen the long-term outlook for the world’s largest economy, and the data could spark increased volatility in the dollar-based exchange rates as investors weigh the prospects for a sustainable recovery. Nevertheless, with the EU Summit on tap for tomorrow, the ongoing turmoil in the European financial system may continue to bear down on investor confidence, and the group may take additional steps to buy more time as policy makers struggle to meet on common ground.

Will the EUR/USD Retrace the Advance From February? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

14:45

09:45

Bloomberg Consumer Comfort (MAR)

--

-39.3

USD

19:00

14:00

Monthly Budget Statement (FEB)

-$240.5B

-$220.9B

Currency

GMT

Release

Expected

Actual

Comments

NZD

20:00

RBNZ Rate Decision MAR

2.75%

2.50%

Cuts rate to record low

NZD

21:45

Card Spending (MoM) (FEB)

--

-0.2%

Contracts after hitting record high in Jan.

JPY

23:50

GDP Annualised (4Q)

-1.2%

-1.3%

GDP revised down from initial estimate on weak consumer spending and investment

JPY

23:50

GDP (QoQ) (4Q)

-0.3%

-0.3%

JPY

23:50

GDP Deflator (YoY) (4Q)

-1.6%

-1.6%

JPY

23:50

Domestic Corp. Goods Price Index (MoM) (FEB)

0.4%

0.2%

Pace slows after spiking in Dec/Jan

JPY

23:50

Domestic Corp. Goods Price index (YoY) (FEB)

1.9%

1.7%

Continues recent rising trend

JPY

23:50

Nominal GDP (QoQ) (4Q)

-0.7%

-0.7%

2nd contraction in last 3

AUD

00:00

Consumer Inflation Expectations (MAR)

--

3.6%

Continues to ease of recent highs in Jan.

AUD

00:30

Employment Change (FEB)

--

-10.1K

Cyclone disrupts hiring. Employment change fell for 1st time in 18-months as labour market picture weakens

AUD

00:30

Unemployment Rate (FEB)

5.0%

5.0%

AUD

00:30

Full Time Employment Change (FEB)

--

47.6K

AUD

00:30

Part Time Employment Change (FEB)

--

-57.7K

AUD

00:30

Participation Rate (FEB)

65.9%

65.7%

CNY

02:00

Trade Balance (USD) (FEB)

4.90B

-7.30B

Worst trade deficit in seven years.

CNY

02:00

Exports (YoY) (FEB)

27.1%

2.4%

CNY

02:00

Imports (Yoy) (FEB)

32.6%

19.4%

JPY

06:00

Machine Tool Order (YoY) (FEB)

--

73.7%

Falls back after spiking higher in Jan

EUR

06:30

French Non-Farm Payrolls (QoQ) (4Q)

0.2%

0.2%

Growth remains weak

EUR

07:45

French Industrial Production (MoM) (JAN)

0.5%

1.0%

3rd straight expansion

EUR

07:45

French Industrial Production (YoY) (JAN)

5.0%

5.4%

Pace falls back after 7 month high in Dec

EUR

07:45

French Manufacturing Production (MoM) (JAN)

0.4%

1.8%

Rebounds from contraction in Dec.

EUR

07:45

French Manufacturing Production (YoY) (JAN)

5.0%

6.8%

Hits 8-month high

EUR

08:00

German Exports (MoM) (JAN)

0.7%

-1.0%

4th contraction in last 7

EUR

08:00

German Imports (MoM) (JAN)

1.5%

2.3%

Climbs for 3rd time in last 4

EUR

08:00

German Current Account (euros) (JAN)

10.5B

7.2B

Lowest since June ‘10

EUR

08:00

German Trade Balance (euros) (JAN)

13.0B

10.1B

EUR

09:00

Italian Industrial Production (MoM) (JAN)

0.6%

-1.5%

Contracts for 3rd time in last 5

EUR

09:00

Italian Industrial Production (YoY) (JAN)

4.4%

3.8%

Pace of expansion slows sharply.

GBP

09:30

Industrial Production (MoM) (JAN)

0.4%

0.5%

Maintains growth after contraction in Oct ‘10

GBP

09:30

Industrial Production (Yoy) (JAN)

4.2%

4.4%

Best since Nov. 1994

GBP

09:30

Manufacturing Production (MoM) (JAN)

0.6%

1.0%

Fastest in 10-months

GBP

09:30

Manufacturing Production (YoY) (JAN)

6.3%

6.8%

Best since Dec. 1994

GBP

12:00

Bank of England Rate Decision

0.50%

0.50%

BoE minutes on March 23 may show a growing shift within the MPC.

GBP

12:00

Bank of England Asset Purchase Target

200B

200B

CAD

13:30

International Merchandise Trade (JAN)

2.6B

0.1B

Smallest surplus in two-months.

USD

13:30

Trade Balance (JAN)

-$41.4B

-$46.3B

Largest deficit since August.

USD

13:30

Continuing Claims (FEB 26)

3750K

3771K

Lowest since October 2008.

USD

13:30

Initial Jobless Claims (MAR 5)

376K

397K

Highest since the second week of Feb.

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