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Euro Rally Threatened By Greek Default, ECB’s Second LTRO In Focus

Euro Rally Threatened By Greek Default, ECB’s Second LTRO In Focus

2012-02-24 14:30:00
David Song, Strategist
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Talking Points

  • Euro: ECB Softens Dovish Tone, Second LTRO In Focus
  • British Pound: Private Consumption Rebounds In 4Q, Stronger Recovery Ahead
  • U.S. Dollar: Index Breaks Upward Trend, Fed Doves On Tap

Euro: ECB Softens Dovish Tone, Second LTRO In Focus

The Euro advanced to a fresh yearly high of 1.3424 as the European Central Bank softened its dovish tone for monetary policy, but we may see the single currency come under pressure next week amid threats of a Greek default. Indeed, ECB board member Ewald Nowotny struck a neutral tone while speaking in Vienna and said that he does not ‘see any further need for action’ as the central bank prepares to launch its second three-year loan facility next week. However, the outcome may spook investors should demands well exceed the EUR 489B offered back in December.

At the same time, Governing Council Member Benoit Coeure argued against a zero-interest rate policy, stating that the ‘costs of an anticipated protracted low-rate policy - in terms of fueling risk taking, promoting an overhang of non- performing loans and prolonging future imbalances - can be significant,’ and it seems as though the ECB will maintain a wait-and-see approach for the remainder of the year as policy makers expect to see a gradual recovery later this year. However, concerns regarding the implementation of Greece’s second-bailout package may drag on market sentiment as Finland’s parliament said it will delay its vote to February 29, and heightening threats of a default may trigger sharp reversal in the EURUSD as market participants see Moody’s and Standard & Poor’s lowering their credit rating for the region. Although the euro-dollar remains on track to test the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we may see a near-term correction next week as the relative strength index approaches oversold territory, but the outcome of the second LTRO is expected to have a major impact on the exchange rate as market participants weigh the prospects for future policy.

British Pound: Private Consumption Rebounds In 4Q, Stronger Recovery Ahead

The British Pound continue to recoup the losses from earlier this week, with the GBP/USD advancing to an overnight high of 1.5835, but we may see the exchange rate track sideways over the near-term as it remains capped by the 200-Day SMA at 1.5910. Although the preliminary 4Q GDP report reaffirmed a 0.2% contraction in the growth rate, but the rebound in private sector consumption paired with the improvement in net exports encourages an improved outlook for the region as the Bank of England anticipates to see a more robust recovery in 2012. In turn, we should see the BoE endorse a wait-and-see approach throughout the year, and easing bets for more quantitative easing should help to prop up the sterling as the fundamental outlook for the U.K. picks up. However, as the GBP/USD maintains the broad range from earlier this month, we will need to see a slew of positive developments next week to set the stage for a bullish breakout, and the sterling may have carved out a higher low in February as price action continues to hold above the 50-Day SMA (1.5627).

U.S. Dollar: Index Breaks Upward Trend, Fed Doves On Tap

The greenback is struggling to hold its ground during the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the overnight advance to 9,843, and we may see the reserve currency trade heavy in the following week as the rebound in risk-taking behavior gathers pace. As we have a slew of Fed doves scheduled to speak later today, speculation for QE3 could further dampen the appeal of the reserve currency, and we may see the USDOLLAR give back the rebound from 9,672 as the index breaks out of the upward trending channel from earlier this month. However, we may see the FOMC talk down speculation for another large-scale asset purchase program in light of the more robust recovery, and we expect the central bank to maintain a wait-and-see approach throughout 2012 as growth and inflation pick 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

14:45

9:45

BoC Governor Mark Carney Speaks on Monetary Policy

--

--

USD

14:55

9:55

U. of Michigan Confidence (FEB F)

72.9

72.5

USD

15:00

10:00

New Home Sales (MoM) (JAN)

2.6%

-2.2%

USD

15:00

10:00

New Home Sales (JAN)

315K

307K

USD

15:45

10:45

Fed's John Williams Speaks on U.S. Economy, Monetary Policy

--

--

USD

16:35

11:35

Fed's James Bullard Speaks on U.S. Economy, Monetary Policy

--

--

EUR

17:00

12:00

French Total Jobseekers Change (JAN)

32.5

29.7

EUR

17:00

12:00

French Total Jobseekers (JAN)

2874.5k

USD

18:30

13:30

Fed's Charles Plosser Speaks on Monetary Policy

--

--

USD

18:30

13:30

Fed's William Dudley Speaks on Monetary Policy

--

--

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:50

Corporate Service Price (YoY) (JAN)

0.1%

-0.2%

Contracts for the third time in the last six months.

EUR

7:00

German GDP s.a. (QoQ) (4Q F)

-0.2%

-0.2%

Consumption contracts for the second quarter in 2011, while capital investments marked the biggest advance since the first-quarter.

EUR

7:00

German GDP w.d.a. (YoY) (4Q F)

2.0%

2.0%

EUR

7:00

German GDP n.s.a. (YoY) (4Q F)

1.5%

1.5%

EUR

7:00

German Private Consumption (4Q)

-0.1%

-0.2%

EUR

7:00

German Capital Investment (4Q)

0.5%

1.1%

EUR

7:00

German Domestic Demand (4Q)

--

0.1%

EUR

7:00

German Construction Investment (4Q)

--

1.9%

EUR

7:00

German Government Spending (4Q)

0.0%

0.1%

EUR

7:00

German Exports (4Q)

-1.4%

-0.8%

EUR

7:00

German Imports (4Q)

-0.9%

-0.3%

EUR

7:45

French Consumer Confidence Indicator (FEB)

82

82

Highest since October.

EUR

9:00

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

-0.5%

-1.1%

Biggest decline since 2004.

EUR

9:00

Italian Retail Sales (YoY) (DEC)

--

-3.7%

GBP

9:30

Gross Domestic Product (QoQ) (4Q P)

-0.2%

-0.2%

Consumption expands for the first time since 2Q 2010, while investments marked the biggest decline since 3Q 2010.

GBP

9:30

Gross Domestic Product (YoY) (4Q P)

0.8%

0.7%

GBP

9:30

Private Consumption (4Q P)

0.2%

0.5%

GBP

9:30

Gross Fixed Capital Formation (4Q P)

-0.9%

-2.8%

GBP

9:30

Government Spending (4Q P)

0.0%

1.0%

GBP

9:30

Exports (4Q P)

1.5%

2.3%

GBP

9:30

Imports (4Q P)

0.1%

0.4%

GBP

9:30

Index of Services (MoM) (DEC)

0.1%

0.2%

Increases for the second month.

GBP

9:30

Index of Services (3Mo3M) (DEC)

0.0%

0.0%

GBP

9:30

Total Business Investment (QoQ) (4Q P)

-0.4%

-5.6%

Contracts for the second quarter in 2011.

GBP

9:30

Total Business Investment (YoY) (4Q P)

2.5%

-2.0%

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