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Forex: Euro Gains Ground As EU Expands Bailout Fund, British Pound To Face Range-Bound Price Action

Forex: Euro Gains Ground As EU Expands Bailout Fund, British Pound To Face Range-Bound Price Action

2011-03-14 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Range-Bound Price Action Ahead
  • Euro: EU Plans To Strengthen EFSF
  • U.S. Dollar: To Benefit From Risk Aversion

The Euro rallied to 1.3979 during the overnight trade as the EU laid out broad plans to increase the scope of the European Financial Stability Facility, but the advance could be short-lived as market sentiment remains battered by the uncertainties surrounding the global economy. The EU said it would allow the bailout fund to utilize the full EUR 440B in order to stem the risk for contagion, and agreed to curb borrowing costs for Greece as the government struggles to manage its public finances. The group is scheduled to make their final agreement at the Summit on March 24, and the renewed efforts to mitigate the downside risks for the region should help to prop up the single-currency as investors weigh the prospects for a sustainable recovery.

In turn, the EUR/USD may continue to retrace the decline from earlier this month, and the exchange rate may work its way back above 1.4000 over the next 24 hours of trading as the single-currency outperforms against its major counterparts. As market participants speculate the European Central Bank to raise the benchmark interest rate by 25bp next month, the near-term rally in the euro-dollar could gather pace going forward, and the bullish sentiment underlying the single-currency could push the exchange rate back to the November highs as the central bank holds a hawkish tone for future policy. According to Credit Suisse overnight index swaps, investors are pricing a 100 percent chance for a rate hike in April, but the rise in borrowing costs could be a one-time deal as the region continues to cope with an uneven recovery.

The British Pound bounced back from a low of 1.6026 on Monday, but the sterling may face headwinds over the near-term as interest rate expectations deteriorate. Investors now see borrowing costs in the U.K. rising 50bp over the next 12-months after expecting at least 75bp worth of rate hikes in February, and the GBP/USD may continue to congest ahead of the Bank of England policy meeting minutes due out on March 23 as market participants see a soften case for higher interest rates in Britain. As the GBP/USD works its way back to the February lows, the pound-dollar may face range-bound price action going into the end of March, and the exchange rate may trend sideways throughout the first-half of 2011 as the central bank maintains its wait-and-see approach for monetary policy.

U.S. dollar price action was mixed on Monday, with the USD/JPY bouncing back from a fresh yearly low of 80.52, but the greenback may regain its footing during the North American trade as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for the beginning of the week, risk sentiment should continue to dictate price action for the majors, and the reserve-currency is likely to benefit from safe-haven flows as the uncertainties surrounding the global economy continues to bear down on market sentiment.

Will the EUR/USD Continue to Retrace the Decline From November? 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

CAD

12:30

07:30

Capacity Utilization Rate Q4

79.0%

78.1%

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:55

REINZ Housing Price Index (FEB)

--

3192.9

Climbs off 19-month low

NZD

21:55

REINZ Housing Price Index (MoM) (FEB)

--

2.3%

Rebounds from record contraction in Jan

NZD

21:55

REINZ House Sales (YoY) (FEB)

--

-10.5%

14th consecutive contraction

CNY

02:09

New Yuan Loans (FEB)

600.0B

535.6B

Falls back after spike in Jan.

CNY

02:09

Money Supply – M0 (YoY) (FEB)

16.8%

10.3%

Falls sharply from record high in Jan.

CNY

02:09

Money Supply – M1 (YoY) (FEB)

17.8%

14.3%

Climbs after sharp slowdown in Jan

CNY

02:09

Money Supply – M2 (YoY) (FEB)

17.0%

15.7%

Hits 29-month low

JPY

04:30

Consumer Confidence( FEB)

--

40.6

Eases off multi-month high in Jan.

JPY

04:30

Consumer Confidence Households (FEB)

41.5

40.7

JPY

04:30

Industrial Production (MoM) (JAN)

--

1.3%

Pace slows after spiking in Dec.

JPY

04:30

Industrial Production (Yoy (JAN)

--

3.5%

Pace continues to ease

JPY

04:30

Capacity Utilization (MoM) (JAN)

--

3.6%

3rd straight expansion after 5 consecutive contractions

JPY

05:50

Bank of Japan Interest Rate Decision

0.1%

0.10%

EUR

10:00

Euro-zone Industrial Production (YoY) (JAN)

6.5%

6.6%

Slowest growth since Sept ‘10

EUR

10:00

Euro-zone Industrial Production (MoM) (JAN)

0.3%

0.3%

Remains at 3-month low

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