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Euro Setting Up For Major Decline, Sterling Poised For Correction

Euro Setting Up For Major Decline, Sterling Poised For Correction

2012-02-22 14:05:00
David Song, Strategist
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Talking Points

  • Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’
  • British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA
  • U.S. Dollar: Index To Consolidate, Fundaments To Improve Further

Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’

The Euro fell back from an overnight high of 1.3263 as Fitch lowered Greece’s credit rating to C from CCC, and warned that a default is ‘highly likely in the near term’ as the group plans to categorize the region’s debt as a ‘Restricted Default’ once the government concludes the PSI deal. At the same time, Germany talked down speculation of increasing the bailout fund at the March Summit, stating that there’s no need to increase the scope of the European Stability Mechanism, and argued against setting precedence for the periphery countries as Greece remains a ‘singular case in terms of the depth of its problems.’

Indeed, mounting threats of a Greek default reinforces a bearish outlook for the Euro, and the single currency looks poised to give back the advance from earlier this year as the fundamental outlook for the region turns increasingly bleak. As the EUR/USD remains capped by the 100-Day SMA (1.3310), the pair appears to be putting in a lower top ahead of March, but we would like to see the pair close below the 50-Day SMA (1.3022) to set the stage for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.

British Pound: BoE Votes 7-2, Sideways Price Action Ahead

The British Pound tumbled to an overnight low of 1.5660 as the Bank of England Minutes spurred speculation for more quantitative easing, but the GBP/USD may continue to track sideways over the near-term as it maintains the range from earlier this month. Indeed, the Monetary Policy Committee voted 7-2 to expand the asset purchase program to GBP 325B, while Adam Posen and David Miles pushed for a GBP 75B increase amid the risk of undershooting the 2% target for inflation. However, we saw the BoE continue to soften its dovish tone for monetary policy as central bank officials expect to see a more robust recovery in 2012, and we may see a growing rift within the MPC as policy makers argue against sending the wrong message about the U.K. economy. Although the GBP/USD sold off following the announcement, we expect to see a short-term correction in the exchange rate as the it continues to hold above the 50-Day SMA (1.5617), and the pair may continue to trend sideways over the near-term as it remains capped by the 200-Day SMA at 1.5914.

U.S. Dollar: Index Hits Fresh Monthly High, Existing Homes Sales On Tap

The greenback continued to appreciate on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh monthly high of 9,893, and the reserve currency may continue to retrace the decline from earlier this year as the flight to safety gathers pace. However, as we’re expecting to see U.S. existing home sales increase another 1.1% in January, the ongoing improvement in the housing market could spur a shift in risk-taking behavior, and an above-forecast print could lift trader sentiment as it raises the outlook for future growth. Nevertheless, the more robust recovery in the world’s largest economy will continue to limit the Fed’s scope to push through another large-scale asset purchase program, and market dynamics may change throughout the course of the year should the FOMC continue to soften its dovish tone for monetary policy.

--- 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

15:00

10:00

Existing Home Sales (MoM) (JAN)

1.1%

5.0%

USD

15:00

10:00

Existing Home Sales (JAN)

4.66M

4.61M

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:00

Conference Board Leading Index (DEC)

--

0.2%

Two-month high.

AUD

23:30

Westpac Leading Index (MoM) (DEC)

--

0.5%

Rises for the first time since August.

AUD

0:00

DEWR Internet Skilled Vacancies (MoM) (JAN)

--

-0.6%

Contracts for the ninth month.

AUD

0:30

Wage Cost Index (QoQ) (4Q)

0.8%

1.0%

Fastest pace of growth since 4Q 2010.

AUD

0:30

Wage Cost Index (YoY) (4Q)

3.4%

3.6%

NZD

2:00

Credit Card Spending s.a. (MoM) (JAN)

--

0.8%

Rises for the second month.

NZD

2:00

Credit Card Spending (YoY) (JAN)

--

3.1%

JPY

5:00

Supermarket Sales (YoY) (JAN)

--

-1.2%

Contracts for the sixth month.

EUR

6:30

French Consumer Price Index (MoM) (JAN)

-0.2%

-0.4%

Slowest pace of growth since October.

EUR

6:30

French Consumer Price Index (YoY) (JAN)

2.5%

2.3%

EUR

6:30

French CPI - EU Harmonised (MoM) (JAN)

-0.2%

-0.4%

EUR

6:30

French CPI - EU Harmonised (YoY) (JAN)

2.7%

2.6%

EUR

6:30

French CPI Ex Tobacco Index (JAN)

123.49

123.06

EUR

8:00

French PMI Manufacturing (FEB P)

49.0

50.2

Manufacturing expands for the first time since July.

EUR

8:00

French PMI Services (FEB P)

52.0

50.3

EUR

8:30

German PMI Manufacturing (FEB A)

51.5

50.1

Service-based activity expands for third month.

EUR

8:30

German PMI Services (FEB A)

53.8

52.6

EUR

9:00

Euro-Zone PMI Manufacturing (FEB A)

49.4

49.0

Contracts for the fifth time in the last sixth months.

EUR

9:00

Euro-Zone PMI Services (FEB A)

50.6

49.4

EUR

9:00

Euro-Zone PMI Composite (FEB A)

50.5

49.7

EUR

9:00

Italian CPI (NIC incl. tobacco) (MoM) (JAN F)

0.3%

0.3%

Slowest pace of growth since September.

EUR

9:00

Italian CPI (NIC incl. tobacco) (YoY) (JAN F)

3.2%

3.2%

EUR

9:00

Italian CPI - EU Harmonized (MoM) (JAN F)

-1.8%

-1.8%

EUR

9:00

Italian CPI - EU Harmonized (YoY) (JAN F)

3.4%

3.4%

EUR

10:00

Euro-Zone Industrial New Orders s.a. (MoM) (DEC)

0.5%

1.9%

Biggest advance since May.

EUR

10:00

Euro-Zone Industrial New Orders (YoY) (DEC)

-2.8%

-1.7%

USD

12:00

MBA Mortgage Applications (FEB 17)

--

-4.5%

Contracts for second week.

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