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Euro To Fall Further As EU Tries To Buy More Time, Pound Outperforms

Euro To Fall Further As EU Tries To Buy More Time, Pound Outperforms

David Song, Strategist

Talking Points

  • Euro: ISDA Says No Credit Event On ECB Swap, EU Summit Fails To Restore Confidence
  • British Pound: BoE Softens Dovish Tone, Interest Rate Expectations Pick Up
  • U.S. Dollar: Bernanke Testimony Continues, ISM Manufacturing On Tap

Euro: ISDA Says No Credit Event On ECB Swap, EU Summit Fails To Restore Confidence

Although the International Swap & Derivatives Association said the European Central Bank’s Greek bond swap would not trigger a credit event, the group warned that a ‘credit event could occur at a later date,’ and we expect to see the EURUSD track lower in March as it threatens the upward trending channel carried over from earlier this year. Nevertheless, as the EU Summit comes into focus, headlines coming out of Europe is likely to produce increased volatility in the exchange rate, but the group may fail to shore up investor confidence should we see policy makers struggle to meet on common ground.

Indeed, German Finance Minister Wolfgang Schaeuble expects Greece to strike a deal with private creditors once the government ‘has fulfilled its prior actions requirements,’ but we may see the EU make another attempt to buy more time as the group pledges to come up with new means to stimulate growth. As the EURUSD carves out a near-term top just below the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, the short-term reversal should gather pace in March, and we should expect to see a test of the 38.2% Fib around 1.3100 as the pair threatens the upward trending channel carried over from earlier this year.

British Pound: BoE Softens Dovish Tone, Interest Rate Expectations Pick Up

The British Pound advanced to an overnight high of 1.5960 as the Bank of England struck a less dovish tone for monetary policy, and the sterling may continue to retrace the decline from back in October as the fundamental outlook for the U.K. picks up. Indeed, BoE board member Martin Weale talked down speculation for more quantitative easing as central bank officials expect to see a more robust recovery in 2012, and warned that the stickiness in inflation could prompt a rate hike as economic activity gathers pace. As the Monetary Policy Committee looks to conclude its easing cycle this year, the shift in central bank rhetoric should help to prop up the sterling as market participants curb bets for additional monetary support. In turn, we may see the British Pound outperform against its major counterparts over the near-term, and the GBPUSD looks poised to make another run at the 23.6% Fib from the 2009 low to high around 1.6250 as interest rate expectations gather pace.

U.S. Dollar: Bernanke Testimony Continues, ISM Manufacturing On Tap

The greenback struggled to hold its ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,805, but we may see the reserve currency regain its footing during the North American trade should Fed Chairman Ben Bernanke continue to soften his dovish tone for monetary policy. As Mr. Bernanke is scheduled to testify in front of the Senate Banking Committee at 15:00 GMT, we may see the central bank head talk down speculation for another large scale asset purchase program, and easing bets for QE3 should prop up the USD as the fundamental outlook for the world’s largest economy improves. In turn, the recent weakness in the reserve currency is likely to be short-lived, and we may see the index climb back towards the 61.8% Fib around 9,949 as it carves out a higher low in February. However, as the ISM Manufacturing survey is expected to tip higher for the fourth consecutive month, the development could fuel the rise in risk-taking behavior, and we may see the major currencies face choppy price action going into the testimony as market participants weigh the prospects for future 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

Fed Chairman Ben Bernanke Delivers Monetary Policy Report

--

--

USD

15:00

10:00

Construction Spending (MoM) (JAN)

1.0%

1.5%

USD

15:00

10:00

ISM Manufacturing (FEB)

54.5

54.1

USD

15:00

10:00

ISM Prices Paid (FEB)

57.5

55.5

USD

15:30

10:30

Fed's Sarah Raskin Speaks on U.S. Economy

--

--

EUR

17:00

12:00

Italian New Car Registrations (YoY) (FEB)

-16.93%

USD

17:30

12:30

Fed's Dennis Lockhart Speaks on U.S. Economy, Banking

--

--

EUR

18:00

13:00

Italian Budget Balance (euros) (FEB)

--

-3.3B

EUR

18:00

13:00

Italian Budget Balance (euros) (YTD) (FEB)

--

-3.3B

USD

22:00

17:00

Domestic Vehicle Sales (FEB)

11.00M

11.05M

USD

22:00

17:00

Total Vehicle Sales (FEB)

14.00M

14.13M

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Terms of Trade Index (QoQ) (4Q)

-1.9%

-1.4%

Largest decline since 3Q 2009.

AUD

22:30

AiG Performance of Manufacturing Index (FEB)

--

51.3%

Expands for third month.

JPY

23:50

Capital Spending (4Q)

-6.5%

7.6%

Biggest advance since 1Q 2007.

JPY

23:50

Capital Spending ex Software (4Q)

-7.4%

4.9%

JPY

23:50

Loans & Discounts Corp (YoY) (JAN)

--

0.0%

Holds roughly flat for second month.

AUD

0:30

Building Approvals (MoM) (JAN)

2.0%

0.9%

Rises for the first time since November.

AUD

0:30

Building Approvals (YoY) (JAN)

-13.7%

-14.6%

AUD

0:30

Private Capital Expenditure (4Q)

3.8%

-0.3%

Contracts for the first time since 2Q 2010.

CNY

1:00

Purchasing Manager Index Manufacturing (FEB)

50.8

51.0

Expands for third month.

CNY

2:30

HSBC Purchasing Manager Index Manufacturing (FEB)

--

49.6

Contracts for the fourth month.

JPY

5:00

Vehicle Sales (YoY) (FEB)

--

31.9%

Falls back from the highest since August 2010.

AUD

5:30

RBA Commodity Price Index (FEB)

--

98.1

Slowest pace of growth since February 2010.

AUD

5:30

RBA Commodity Index SDR (YoY) (FEB)

--

3.5%

EUR

6:30

French ILO Mainland Unemployment Rate (4Q)

9.6%

9.4%

Jobless holds at the highest since 1Q 2010.

EUR

6:30

French Mainland Unemployment Change (4Q)

--

50K

EUR

6:30

French ILO Unemployment Rate (4Q)

--

9.8%

CHF

6:45

Gross Domestic Product (QoQ) (4Q)

-0.1%

0.1%

Slowest pace of growth since the contraction in 1Q 2009.

CHF

6:45

Gross Domestic Product (YoY) (4Q)

1.0%

1..3%

CHF

8:30

SVME-Purchasing Managers Index (FEB)

48.5

49.0

Contracts for the sixth month.

EUR

8:45

Italian PMI Manufacturing (FEB)

47.1

47.8

Outputs weaken for the seventh consecutive month.

EUR

8:50

French PMI Manufacturing (FEB F)

50.2

50.0

EUR

8:55

German PMI Manufacturing (FEB F)

50.1

50.2

EUR

9:00

Euro-Zone PMI Manufacturing (FEB F)

49.0

49.0

EUR

9:00

Italian Unemployment Rate s.a. (JAN P)

--

9.2%

Highest since the series began in 2004.

GBP

9:30

Purchasing PMI (FEB)

52.0

51.2

Expands for second month.

EUR

10:00

Euro-Zone Consumer Price Index Estimate (YoY) (FEB)

2.6%

2.7%

Holds steady for second month.

EUR

10:00

Euro-Zone Unemployment Rate (JAN)

10.4%

10.7%

Rises to a 14-year high.

EUR

10:00

Italian CPI (NIC incl. tobacco) (MoM) (FEB P)

0.2%

0.4%

Fastest pace of growth since November.

EUR

10:00

Italian CPI (NIC incl. tobacco) (YoY) (FEB P)

3.1%

3.3%

EUR

10:00

Italian CPI - EU Harmonized (MoM) (FEB P)

0.2%

0.2%

EUR

10:00

Italian CPI - EU Harmonized (YoY) (FEB P)

3.4%

3.4%

CAD

13:30

Current Account (BoP) (Canadian dollar) (4Q)

-$9.6B

-$10.3B

Smallest deficit since 1Q 2011.

CAD

13:30

Industrial Product Price (MoM) (JAN)

0.3%

0.3%

Rising inflation amid higher oil prices.

CAD

13:30

Raw Materials Price Index (MoM) (JAN)

0.5%

0.1%

USD

13:30

Personal Income (JAN)

0.5%

0.3%

Slowest pace of growth since November.

USD

13:30

Personal Spending (JAN)

0.4%

0.2%

Expands for the first time in two-months.

USD

13:30

PCE Deflator (YoY) (JAN)

2.3%

2.4%

Holds at the highest since November 2008.

USD

13:30

PCE Core (MoM) (JAN)

0.2%

0.2%

USD

13:30

PCE Core (YoY) (JAN)

1.9%

1.9%

USD

13:30

Initial Jobless Claims (FEB 25)

353K

351K

Lowest since March 2008.

USD

13:30

Continuing Claims (FEB 18)

3413K

3402K

Lowest since August 2008.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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