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Euro Rebound To Taper Off, British Pound Outlook Weakens Further

Euro Rebound To Taper Off, British Pound Outlook Weakens Further

2012-01-17 14:30:00
David Song, Strategist
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Talking Points

  • Euro: ESFS Auction Generates Positive Results, ECB To Keep Rates On Hold
  • British Pound: U.K. Inflation Cools, Further Easing Ahead
  • U.S. Dollar: Weighed By Risk Appetite, Index Maintains Upward Trend

Euro: ESFS Auction Generates Positive Results, ECB To Keep Rates On Hold

The Euro rallied to an overnight high of 1.2665 as the European Financial Stability Facility’s EUR 1.5B bond auction fueled EUR 4.66B in bids, but the rebound in the EUR/USD is likely to be short-lived as the exchange rate maintains the downward trending channel from the end of October. Indeed, the recent developments suggest that market participants are brushing off the slew of credit-rating downgrades across the euro-area, and the rise in market sentiment may gather pace over the next 24-hours of trading as European policy makers increase their efforts to stem the risk for contagion.

As the ongoing turmoil in the financial system drags on the real economy, European Central Bank board member Ewald Nowotny endorsed the nonstandard measures and said that the Governing Council will continue to utilize its bond purchasing program for the time being, but went onto say that the central bank has ‘no plans’ to push the benchmark interest rate below 1.00% according to an interview with the Wall Street Journal. As the ECB talks down speculation for additional monetary support, easing bets for lower borrowing costs may prop up the single currency, but the euro-dollar may reverse course in the coming days as the exchange rate remains capped by the 20-Day SMA at 1.2885. As the fundamental outlook for Europe turns increasingly bleak, we expect the EUR/USD to maintain the downward trending channel carried over from the end of October, and the 78.6% Fibonacci retreatment from the 2009 high to the 2010 low around 1.2630-50 should ultimately give way as

British Pound: U.K. Inflation Cools, Further Easing Ahead

The British Pound extended the advance from the previous day to reach a high of 1.5403, but the lack of momentum to push back above the 10-Day SMA (1.5416) reinforces a bearish outlook for the sterling as the fundamental outlook for the U.K. deteriorates. As the headline reading for U.K. inflation expands at the slowest pace in six-months, the tepid recovery may encourage the Bank of England to expand monetary policy further in 2012, and the central bank may see scope to increase its asset purchase program beyond the GBP 275B target as the region faces a growing risk of a double-dip recession. In turn, the BoE meeting minutes due out on January 25 may highlight expectations for additional monetary support, and the GBP/USD may track lower over the coming days as market participants ramp up expectations for more quantitative easing. As the pound-dollar struggles to recoup the losses from earlier this month, the 50.0% Fib from the 2009 low to high around 1.5270-1.5300 may give out in the coming days, and the exchange rate may work its way back towards the 61.8% Fib around 1.4850 as we expect to see the BoE maintain a dovish tone for monetary policy.

U.S. Dollar: Weighed By Risk Appetite, Index Maintains Upward Trend

The greenback continued to weaken against its major counterparts on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,932, and the rise in risk appetite may gather pace throughout the North American trade as the U.S. market opens higher. However, as the ongoing turmoil in Europe takes center stage, the heightening risk for contagion may halt the short-term correction across the major exchange rates, and we may see the reserve currency regain its footing heading into the middle of the week as the economic docket is expected to reinforce an improved outlook for the world’s largest economy. As the USDOLLAR maintains the upward trend carried over from the previous year, the recent weakness in the dollar is likely to be short-lived, and we expect to see further advances in the greenback as the index appears to be carving out a higher low.

--- 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.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

14:00

9:00

Bank of Canada Interest Rate Decision

1.00%

1.00%

EUR

18:30

13:30

ECB's Jens Weidmann Speaks on Euro Economy

GBP

18:30

13:30

BoE's Adam Posen Speaks on U.K. Economy

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:00

NZIER Business Opinion Survey (4Q)

--

0

Lowest since the first quarter.

NZD

21:45

Card Spending - Retail (MoM) (DEC)

0.2%

-0.3%

Declines for the second straight month.

NZD

21:45

Card Spending (MoM) (DEC)

-0.2%

-0.2%

JPY

23:50

Tertiary Industry Index (MoM) (NOV)

-0.4%

-0.8%

Biggest decline since March.

CNY

2:00

Real Gross Domestic Product (QoQ) (DEC)

--

2.0%

Slowest pace of annualized growth since 2Q 2009.

CNY

2:00

Real Gross Domestic Product (YoY) (DEC)

8.7%

8.9%

CNY

2:00

Real Gross Domestic Product (YTD) (YoY) (DEC)

9.2%

9.2%

CNY

2:00

Retail Sales (YoY) (DEC)

17.2%

18.1%

Fastest pace of growth since January 2011.

CNY

2:00

Retail Sales (YTD) (YoY) (DEC)

17.0%

17.1%

CNY

2:00

Industrial Production (YoY) (DEC)

12.3%

12.8%

Rises for the first time since September.

CNY

2:00

Industrial Production (YTD) (YoY) (DEC)

13.8%

13.9%

CNY

2:00

Fixed Assets Investment ex Rural (YTD) (YoY) (DEC)

24.1%

23.1%

Slowest pace of growth since February 2007.

NZD

2:00

Non Resident Bond Holdings (DEC)

--

59.1%

Lowest since July 2004.

JPY

6:00

Machine Tool Orders (YoY) (DEC F)

--

17.4%

Below 20% for the second month.

EUR

7:00

EU 25 New Car Registrations (DEC)

--

-6.4%

Declines for the third month.

GBP

9:30

DCLG UK House Prices (YoY) (NOV)

--

-0.3%

Falls for the eighth consecutive month.

GBP

9:30

Consumer Price Index (MoM) (DEC)

0.4%

0.4%

Slowest pace of growth since June 2011.

GBP

9:30

Consumer Price Index (YoY) (DEC)

4.2%

4.2%

GBP

9:30

Core Consumer Price Index (YoY) (DEC)

3.0%

3.0%

GBP

9:30

Retail Price Index (DEC)

239.1

239.4

Rises at the slowest pace since December 2010.

GBP

9:30

Retail Price Index (MoM) (DEC)

0.3%

0.4%

GBP

9:30

Retail Price Index (YoY) (DEC)

4.7%

4.8%

GBP

9:30

Retail Price Index Ex Mort Int.Payments (YoY) (DEC)

4.9%

5.0%

EUR

10:00

Euro-Zone CPI (MoM) (DEC)

0.4%

0.3%

Slowest rate of inflation since August 2011.

EUR

10:00

Euro-Zone CPI (YoY) (DEC)

2.8%

2.7%

EUR

10:00

Euro-Zone CPI - Core (YoY) (DEC)

1.6%

1.6%

EUR

10:00

German ZEW Survey (Economic Sentiment) (JAN)

-49.2

-21.6

Highest reading since July.

EUR

10:00

German ZEW Survey (Current Situation) (JAN)

24.0

28.4

EUR

10:00

Euro-Zone ZEW Survey (Economic Sentiment) (JAN)

--

-32.5

CAD

13:30

International Securities Transactions (Canadian dollar) (NOV)

--

14.99B

Highest since May 2010.

USD

13:30

Empire Manufacturing (JAN)

11.00

13.48

Highest since April.

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