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Euro Clears Resistance Amid Increased Optimism, Sterling Lags Behind

Euro Clears Resistance Amid Increased Optimism, Sterling Lags Behind

2012-01-26 14:55:00
David Song, Strategist
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Talking Points

  • Euro: EU Sees Greek Deal Ahead, 50.0% Fib Retracement In Focus
  • British Pound: Struggles To Hold Above 38.2% Fib, Correction Ahead
  • U.S. Dollar: Index Searches For Support, Bets For QE3 To Deteriorate

Euro: EU Sees Greek Deal Ahead, 50.0% Fib Retracement In Focus

The Euro advanced to a fresh monthly high of 1.3176 as European policy makers talked up expectations of reaching a deal on the Greek PSI talks, but the single currency remains primed to face additional headwinds over the near-term as the heightening risk for contagion bears down on investor confidence. As the European Central Bank steadily oppose taking a haircut on its Greek debt holdings, the increased risk of a default will dampen the appeal of the single currency, and we will need to see the EU ramp up its efforts to address the sovereign debt crisis for the near-term rally to gather pace. As the EUR/USD clears the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we may see the exchange rate continue to retrace the decline from December, and the pair may come up against the 50.0% Fib around 1.3500 should the rise in risk-taking behavior gather pace.

However, as the slowing recovery across the region raises the threat for a major economic downturn in 2012, the weakening outlook for the euro-area will drag on the exchange rate, and we remain bearish against the single currency as the Governing Council is widely expected to expand monetary policy further this year. Nevertheless, ECB board member Jens Weidmann argued that a large-scale asset purchase program would hurt the monetary union according to an interview with a German magazine, and there certainly appears to be a growing rift within the central bank as its ballooning balance sheet comes under scrutiny. In turn, the Governing Council may have little room to prop up the economy further, and ECB President Mario Draghi may continue to target the benchmark interest rate in order to stem the risks surrounding the region.

British Pound: Struggles To Hold Above 38.2% Fib, Correction Ahead

The British Pound extended the rally from earlier this week to reach a fresh yearly high of 1.5717, but the sterling looks poised for a near-term correction as the exchange rate struggles to hold above the 38.2% Fib from the 2009 low to high around 1.5680-1.5700. Should the key Fib level hold up as resistance, we should get a move to the downside going into the following week, and the GBP/USD may continue to track sideways over the near-term as market participants weigh the outlook for the U.K. As the Bank of England softens its dovish tone for monetary policy, the shift in the central bank rhetoric may continue to prop up the sterling, but we may see the pound-dollar turn around as the U.K. faces a growing risk of slipping back into recession. In turn, the GBP/USD may reverse in the coming days, and the exchange rate may fall back towards the 50.0% Fib around 1.5270-1.5300 to test for support.

U.S. Dollar: Index Searches For Support, Bets For QE3 To Deteriorate

The greenback continued to lose ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tumbling to a fresh yearly low of 9,781, and the reserve currency may trade heavy throughout the North American trade as the rise in market sentiment gathers pace. As the U.S. equity market trades higher, increased risk-taking behavior should continue to dampen the appeal of the USD, and the index may continue to give back the rebound from back in November as the Fed keeps the door open to expand monetary policy further. However, as the developments coming out of the world’s largest economy continues to point to a more robust recovery, the data continues to dampen the scope of seeing another round of quantitative easing, and we should see the greenback regain its footing the coming days as the risks surrounding the global economy comes back into focus. In turn, we anticipate to see a shift in trader sentiment, and the USD should regain its footing as speculation for QE3 tapers off.

--- 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

16:00

11:00

Kansas City Fed Manufacturing Activity Index (JAN)

--

-4

NZD

21:45

16:45

Trade Balance (New Zealand dollars) (DEC)

-50M

-308M

NZD

21:45

16:45

Balance (YTD) (New Zealand dollars) (DEC)

723M

555M

NZD

21:45

16:45

Exports (New Zealand dollars) (DEC)

4.11B

3.91B

NZD

21:45

16:45

Imports (New Zealand dollars) (DEC)

4.10B

4.22B

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Corporate Service Price (YoY) (DEC)

0.0%

0.1%

Rises for the second time in 2011.

EUR

7:00

German GfK Consumer Confidence Survey (FEB)

5.6

5.9

Highest since April 2011.

EUR

7:45

French Consumer Confidence Indicator (JAN)

80

81

Rises for the first time since October.

EUR

7:45

French Business Survey Overall Demand (JAN)

--

-12

Lowest since July 2009.

EUR

9:00

Italian Consumer Confidence Index s.a. (JAN)

92.0

91.6

Holds at the lowest since 1996.

EUR

10:00

Italian Hourly Wages (MoM) (DEC)

--

0.0%

Fails to grow for the third straight month.

EUR

10:00

Italian Hourly Wages (YoY) (DEC)

--

1.4%

GBP

11:00

CBI Reported Sales (JAN)

-6

-22

Lowest since February 2009.

USD

13:30

Durable Goods Orders (DEC)

2.0%

3.0%

Rises for the second month, gauge for future investments rises the most since March.

USD

13:30

Durables ex Transportation (DEC)

0.9%

2.1%

USD

13:30

Non-Defense Capital Goods Orders ex Aircrafts (DEC)

1.0%

2.9%

USD

13:30

Non-Defense Capital Goods Shipments ex Aircrafts (DEC)

1.0%

2.9%

USD

13:30

Chicago Fed National Activity Index (DEC)

-0.12

0.17

Highest since July.

USD

13:30

Initial Jobless Claims (JAN 21)

370K

377K

Below 400K for second week.

USD

13:30

Continuing Claims (JAN 14)

3500K

3554K

Below 3600K for second week.

USD

15:00

New Home Sales (MoM) (DEC)

1.9%

-2.2%

Declines for the first time in four months.

USD

15:00

New Home Sales (DEC)

321K

307K

USD

15:00

Leading Indicators (DEC)

0.7%

0.4%

Rises for the eighth month.

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