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Euro Reversal To Gather Pace Ahead Of ECB, Sterling Holds Tight Range

Euro Reversal To Gather Pace Ahead Of ECB, Sterling Holds Tight Range

2012-02-06 14:20:00
David Song, Strategist
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Talking Points

  • Euro: Carves Short-Term Top, Searches For Support Amid Greek Impasse
  • British Pound: Holds 38.2% Fib, Sideways Price Action Ahead Of BoE
  • U.S. Dollar: Breaks Out Of Downward Trend, Index Eyes 50.0% Fib

Euro: Carves Short-Term Top, Searches For Support Amid Greek Impasse

The Euro slipped to an overnight low of 1.3027 as Greece struggles to take the necessary steps to secure its second bailout package, and the single currency may continue to give back the advance from the previous month as the heightening risk for a Greek default drags on investor confidence. Meanwhile, Moody’s Investor Services said that the outcome of the EU Summit in January failed to encourage an improved outlook for the euro-area, and highlighted the risk for contagion as the region may face additional credit-rating downgrades in 2012.

As the fundamental outlook for Europe turns increasingly bleak, we expect the European Central Bank to maintain a dovish tone for monetary policy at its rate decision scheduled for later this week, and the EUR/USD looks poised to retrace the advance from the previous month as market participants see scope for another rate cut in February. According to Credit Suisse overnight index swaps, market participants see a 58% chance for a 25bp rate cut on Thursday, but we may see ECB President Mario Draghi maintain the 1.00% interest rate as the central bank plans to push through another three-year loan facility at the end of the month. As the EUR/USD fails to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, the pair appears to have carved out a short-term top coming into February, and the exchange rate looks poised to fall back towards the 23.6% Fib around 1.2630-50 as it searches for support.

British Pound: Holds 38.2% Fib, Sideways Price Action Ahead Of BoE

The British Pound bounced back from an overnight low of 1.5729 to maintain the narrow range from the end of the previous week, and the sterling may continue to trend sideways ahead of the Bank of England interest rate decision as the central bank is widely expected to expand its asset purchase facility beyond the GBP 275B target. However, as the GBP/USD holds above t he 38.2% Fib from the 2009 low to high around 1.5730-50, it seems as though the pair will consolidate over the coming days, but we may see a sharp reversal in the pound-dollar should the BoE step up its effort to shore up the ailing economy. If the 38.2% Fib gives way, we should see the GBP/USD give back the rebound from 1.5234, and we may see the exchange rate come up against the 50.0% Fib around 1.5300 should the central bank keep the door open to expand monetary policy further in 2012.

U.S. Dollar: Breaks Out Of Downward Trend, Index Eyes 50.0% Fib

The greenback rallied across the board on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,761, and the reserve currency should appreciate further during the North American trade as the flight to safety gathers pace. As the U.S. equity market opens lower, we should see the greenback continue to recoup the losses from the previous week, and the USDOLLAR looks poised to work its way back towards the 50.0% Fib around 9,830 as the index breaks out of the downward trending channel carried over from the previous month. However, as we have central bank hawk Richard Fisher speaking on the economy later today, we may see the Dallas Fed President talk down speculation for another large-scale asset purchase program, and the FOMC may preserve a wait-and-see approach throughout the first-half of 2012 as the fundamental outlook for the world’s largest economy picks up.

--- 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

15:00

10:00

Ivey Purchasing Managers Index s.a. (JAN)

57.0

63.5

EUR

17:00

12:00

EC Presidet Herman Van Rompuy Speaks on Euro Economy

--

--

USD

17:15

12:15

Fed's Richard Fisher Speaks on U.S. Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

TD Securities Inflation (MoM) (JAN)

--

0.2%

Slowest pace of growth in two-months.

AUD

23:30

TD Securities Inflation (YoY) (JAN)

--

2.2%

AUD

0:30

ANZ Job Advertisements (MoM) (JAN)

--

6.0%

Biggest rise since February 2010.

AUD

0:30

Retail Sales s.a. (MoM) (DEC)

0.2%

-0.1%

Contracts for the first time since June.

AUD

0:30

Retail Sales ex Inflation(QoQ) (4Q)

0.6%

0.4%

GBP

8:00

Halifax House Prices s.a. (MoM) (JAN)

0.1%

0.6%

Biggest rise in October.

GBP

8:00

Halifax House Prices (3MoY) (JAN)

-2.1%

1.8%

EUR

9:30

Euro-Zone Sentix Investor Confidence (FEB)

-16.5

-11.1

Highest since July.

EUR

11:00

German Factory Orders s.a. (MoM) (DEC)

1.0%

1.7%

Rises for the seventh time in 2011.

EUR

11:00

German Factory Orders n.s.a. (YoY) (DEC)

-0.4%

0.0%

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