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Euro Euphoria Weighed By Growth Concerns, Sterling To Maintain Range

Euro Euphoria Weighed By Growth Concerns, Sterling To Maintain Range

2012-01-18 14:35:00
David Song, Strategist
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Talking Points

  • Euro: IMF To Boost Lending Capacity, Europe To Contract 0.3%
  • British Pound: Sideways Price Action Ahead, 50.0% Fib To Give Way
  • U.S. Dollar: Weakness To Be Short-Lived, Index Carves Higher Low

Euro: IMF To Boost Lending Capacity, Europe To Contract 0.3%

The Euro advanced to 1.2844 as the International Monetary Fund announced plans to increase its lending capacity by $500B, but we maintain a bearish outlook for the EUR/USD as the EU struggles to stem the heightening risk for contagion. Indeed, Fitch Ratings warned Spain, Italy, Ireland, Cyprus, Belgium and Slovenia may face another ratings cut as the region fails to draw up a ‘comprehensive solution’ to address the debt crisis, while the World Bank lowered its growth forecast for the world economy as the group sees the euro-area contracting 0.3% in 2012.

As the fundamental outlook for the region turns increasingly bleak, the single currency remains poised to face additional headwinds over the near-term, and the lack of momentum to push back above the 20-Day SMA (1.2872) could pave the way for a reversal as the EUR/USD maintains the downward trend carried over from the previous year. Nevertheless, the EU announced that talks on Greece’s second bailout package should resume today as the group looks to settle on a 50% haircut, but the developments may fail to prop up investor confidence should European policy makers struggle to meet on common ground. As long as the EUR/USD holds below the 20-Day SMA, the short-term rebound in the exchange rate should taper off over the remainder of the week, and the 23.6% Fibonacci retracement from the 2009 high to the 2010 low (1.2630-50) looks poised to give way as the heightening risk for contagion continues to drag on market sentiment.

British Pound: Sideways Price Action Ahead, 50.0% Fib To Give Way

The British Pound maintained the narrow range from earlier this week as the GBP/USD pared the overnight advance to1.5397, and the exchange rate may continue to track sideways over the remainder of the week as the pair struggles to push back above the 10-Day SMA (1.5384). As the economic developments coming out of the U.K. highlights an increased risk of a double-dip recession, the Bank of England minutes on tap for the following week could heighten speculation for additional quantitative easing, and the central bank expand its balance sheet throughout 2012 as U.K. policy makers see a growing risk of undershooting the 2% target for inflation. In turn, we may see the GBP/USD clear the 50.0% Fib from the 2009 low to high around 1.5270-1.5300, and the exchange rate may come up against the 61.8% Fib around 1.4850 as market participants see the BoE taking additional steps to shore up the ailing economy.

U.S. Dollar: Weakness To Be Short-Lived, Index Carves Higher Low

The greenback struggled to hold its ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to an overnight low of 9,935, but we should see the reserve currency regain its footing during the North American trade as the rise in risk appetite tapers off. As the U.S. equity market opens lower, the shift in market sentiment should gather pace over the next 24-hours of trading, and we expect to see the USDOLLAR track higher over the remainder of the week as it maintains the upward trend carried over from the previous year. As the dollar index appears to be carving out a higher low in January, we anticipate to see another run at the 78.6% Fib (10,117), but we may see a bullish breakout in the USD as price action approaches the apex of a ascending triangle.

--- 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

USD

14:15

9:15

Industrial Production (DEC)

0.5%

-0.2%

USD

14:15

9:15

Capacity Utilization (DEC)

78.1%

77.8%

USD

14:30

9:30

Fed's Daniel Tarullo to Testify on Volcker Rule

--

--

USD

15:00

10:00

NAHB Housing Market Index (JAN)

22

21

EUR

18:30

13:30

ECB's Jens Weidmann Speaks on Euro Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

Westpac Consumer Confidence (JAN)

--

2.4%

Rises for the fifth time this year.

AUD

23:30

Westpac Consumer Confidence Index (JAN)

--

97.1

AUD

0:30

New Motor Vehicle Sales (MoM) (DEC)

--

-2.9%

Declines for the second month.

AUD

0:30

New Motor Vehicle Sales (YoY) (DEC)

--

-3.0%

JPY

4:30

Industrial Production (MoM) (NOV F)

--

-2.7%

Weakens for the third time this year.

JPY

4:30

Industrial Production (YoY) (NOV F)

--

-4.2%

JPY

4:30

Capacity Utilization (MoM) (NOV F)

--

-2.9%

EUR

9:00

Italian Trade Balance (Total) (euros) (NOV)

--

-1581M

Marks the fourth consecutive deficit.

EUR

9:00

Italian Trade Balance EU (euros) (NOV)

--

-386M

GBP

9:30

Jobless Claims Change (DEC)

7.0K

1.2K

Rises for the 10th month, unemployment highest since January 1996.

GBP

9:30

Claimant Count Rate (DEC)

5.0%

5.0%

GBP

9:30

ILO Unemployment Rate (3M) (NOV)

8.3%

8.4%

GBP

9:30

Average Weekly Earnings ex Bonus (3MoY) (NOV)

1.9%

1.9%

Holds below 2% for the fourth month.

GBP

9:30

Average Weekly Earnings inc Bonus (3MoY) (NOV)

2.0%

1.9%

EUR

10:00

Euro-Zone Construction Output s.a. (MoM) (NOV)

--

0.8%

Rises for the first time since July.

EUR

10:00

Euro-Zone Construction Output w.d.a. (YoY) (NOV)

--

0.2%

CHF

10:00

ZEW Survey (Expectations) (JAN)

--

-50.1

Highest since June.

EUR

10:00

Italian Current Account (euros) (NOV)

--

-3448M

Marks the fourth straight deficit.

USD

12:00

MBA Mortgage Applications (JAN 13)

--

23.1%

Biggest rise since March 2009.

USD

13:30

Producer Price Index (MoM) (DEC)

0.1%

-0.1%

Slowest pace of growth since January. Core PPI rises the most since June 2009.

USD

13:30

Producer Price Index (YoY) (DEC)

5.1%

4.8%

USD

13:30

PPI ex Food & Energy (MoM) (DEC)

0.1%

0.3%

USD

13:30

PPI ex Food & Energy (YoY) (DEC)

2.8%

3.0%

USD

14:00

Total Net TIC Flows (NOV)

$50.0B

$48.6B

Biggest rise since September.

USD

14:00

Net Long-term TIC Flows (NOV)

$40.0B

$59.8B

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