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Forex: Euro Outlook Turns Increasingly Bearish, British Pound Correction Gathers Pace

Forex: Euro Outlook Turns Increasingly Bearish, British Pound Correction Gathers Pace

2011-03-11 13:30:00
David Song, Currency Strategist
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Talking Points

The Euro pared the overnight rally to 1.3839 as the EU failed to address the sovereign debt crisis, and the reversal in the exchange rate may gather pace going into the following week as the uncertainties surrounding the economic outlook continues to bear down on market sentiment. As long-term borrowing costs in Europe reach unsustainable levels, the heightening risk for contagion is likely to bear down on the exchange rate going forward, and the EUR/USD may face additional headwinds over the near-term as European policy makers struggle to meet on common ground. As the EU tries to buy more time, financial conditions in the euro-area is likely to deteriorate further, and the euro-dollar may retrace the advance carried over from the previous month as the pair breaks out of the upward trend from earlier this year. With price action slipping below the 20-Day moving average for the first time since February 22, the EUR/USD may fall back towards the 50-Day SMA (1.3578) in the week ahead, and currency traders may continue to turn a blind eye to the hawkish comments from the European Central Bank as the sovereign debt crisis comes back into focus.

Meanwhile, the British Pound slipped to a fresh monthly low of 1.5976 as the economic docket reinforced a softening outlook inflation, and the sterling may continue to lose ground over the coming week as investors scale back speculation for a rate hike in the first-half of 2011. Producer prices in the U.K. increase at an annualized pace of 5.3% in February to mark the fastest pace of growth since October 2008, while the core PPI unexpectedly fell back to 3.1% during the same period from 3.2% in the month prior. As price growth cools, the Bank of England may see a greater case to retain its wait-and-see approach over the coming months, and the MPC may talk down the risk for inflation in its policy meeting minutes due out on March 23 given the ongoing weakness within the real economy.

The Canadian dollar extended the decline from earlier this week following a the employment report fell short of market expectations, and the near-term reversal in the USD/CAD may gather pace over the following week as the pair appears to have carved out a bottom in March. The Canadian economy added 15.1K job in February amid forecasts for a 25.0K expansion, while the jobless rate unexpectedly held steady at 7.8% for the second consecutive month. As the recovery in the labor market cools, the Bank of Canada may continue to talk down speculation for a rate hike, and the central bank may look to support the real economy throughout the first-half of the year in an effort to balance the risks for the region. As the USD/CAD crosses back above the 20-Day SMA (0.9790), the dollar-loonie should continue to retrace the decline from the previous month, but the short-term rebound in the exchange rate may taper off ahead of the 50-Day SMA at 0.9873 as it fails to close above the moving average throughout the first-quarter.

The U.S. dollar continued to gain ground against its major counterparts on Friday as investors scaled back their appetite for risk, and the rebound in the greenback may accelerate going into the end of the week as equity futures foreshadow a lower open for the U.S. market. Indeed, currency traders showed a muted reaction to the U.S. retail sales report, which showed housing spending increase 1.0% in February, but the U. of Michigan confidence report due out at 14:55 GMT could generate a bearish reaction in the greenback as household sentiment weakens. Tthe U. of Michigan confidence survey is expected to fall back to 76.3 in March from 77.5 in the previous month, and the drop in household sentiment could dampen demands for the dollar as the Federal Reserve maintains a neutral tone for monetary policy. Nevertheless, as the uncertainties surround the global economy intensifies, the flight to safety may carry over into the following week, and the U.S. dollar may continue to appreciate over the near-term as it benefits from safe-haven flows.

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

14:55

09:55

U. of Mich. Confidence (MAR P)

76.3

77.5

USD

15:00

10:00

Business Inventories (JAN)

0.7%

0.8%

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Food Prices (MoM) (FEB)

--

0.1%

Rises for second month.

NZD

02:00

Non-resident Bond Holdings MAR

--

63.1%

Lowest since November.

EUR

07:00

German CPI (MoM) (FEB)

0.5%

0.5%

Rebounds from contraction in Jan.

EUR

07:00

German CPI (YoY) (FEB)

2.0%

2.1%

Pace continues to quicken

EUR

07:45

French Current Account (euros) (JAN)

--

-5.1B

Hits record deficit

EUR

09:00

Italian GDP (YoY) (4Q)

1.3%

1.5%

4th straight quarter of growth

GBP

09:30

PPI Input (MoM) (FEB)

1.5%

1.1%

Slowest growth since Nov.

GBP

09:30

PPI Input (YoY) (FEB)

14.4%

14.6%

Best since Oct ‘08

GBP

09:30

PPI Output (MoM) (FEB)

0.6%

0.5%

Falls back after spike to multi-year highs in Jan.

GBP

09:30

PPI Output (YoY) (FEB)

5.2%

5.3%

Best since Oct ‘08

GBP

09:30

PPI Output Core (MoM) (FEB)

0.4%

0.1%

Falls back after spike higher in Jan

GBP

09:30

PPI Output Core (YoY) (FEB)

3.4%

3.1%

Slows for 2nd time in last 3

CAD

12:00

Net Change in employment (FEB)

23.5K

15.1K

Slowest pace of growth since November.

CAD

12:00

Unemployment Rate (FEB)

7.7%

7.8%

Unchanged from last month.

CAD

12:00

Full Time Employment Change (FEB)

--

-23.8K

Falls for first time in three-months.

CAD

12:00

Part Time Employment Change (FEB)

--

38.9K

Rises for second month.

CAD

12:00

Participation Rate (FEB)

67.0

67.0

Holds steady for second month.

USD

13:30

Advance Retail Sales (FEB)

1.0%

1.0%

Household spending increases for eight consecutive months.

USD

13:30

Retail Sales Ex-Autos & Gas (FEB)

0.5%

0.6%

USD

13:30

Retail Sales Less Autos (FEB)

0.7%

0.7%

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