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Euro Searches For Support As EU Fails To Impress, All Eyes On ECB

Euro Searches For Support As EU Fails To Impress, All Eyes On ECB

2012-03-02 15:15:00
David Song, Strategist
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Talking Points

  • Euro: EU Signs Fiscal Pact, ECB To Maintain Dovish Tone
  • British Pound: Eyes 38.2% Fib For Support, BoE Meeting To Be Overlooked
  • U.S. Dollar: Index To Threaten 61.8% Fib, Fundamentals To Have Greater Impact

Euro: EU Signs Fiscal Pact, ECB To Maintain Dovish Tone

Although 25-members of the EU signed the new fiscal pact at the summit in Brussels, the group did not outline plans to shore up the ailing economy despite the promises made ahead of the meeting. In turn, we saw the Euro extend the decline from earlier this week, with the exchange rate tumbling to a low of 1.3205, and the single currency may face additional headwinds in the week ahead should the European Central Bank cast a dovish outlook for monetary policy.

Indeed, the ECB is widely expected to keep the benchmark interest rate at 1.00%, but we may see President Mario Draghi keep the door open to expand monetary policy further in an effort to lift the economy out of recession. However, as the marked expansion in the ECB’s balance sheet comes under scrutiny, the central bank head may look to target the benchmark interest rate, and the short-term reversal in the EURUSD looks poised to gather pace in the following week as we expect the Governing Council to preserve a cautious tone for the region. As the 50.0% Fibonacci retracement from the 2009 high to the 2010 low (1.3500) holds up as resistance, we may see the euro-dollar come up against the 38.2% Fib (1.3100) to test for support, but the pair may ultimately give back the advance from earlier this year as the EU fails to shore up investor confidence.

British Pound: Eyes 38.2% Fib For Support, BoE Meeting To Be Overlooked

The British Pound came under pressure on Friday amid the shift in risk sentiment, and the GBPUSD may continue to consolidate during the North American trade as the pair appears to have put in a short-term top coming into March. As the pound-dollar struggles to clear 1.6000, we may see the exchange rate fall back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 to test for near-term support. Although we have the Bank of England rate decision on tap for the following week, we may see a muted reaction to the event as the central bank is widely expected to adopt a wait-and-see approach in March, and GBPUSD may track sideways over the near-term as market participants look forward to the policy meeting minutes due out on March 21. However, market participants may turn increasingly bullish against the sterling should the BoE look to conclude its easing cycle in 2012, and the GBPUSD may continue to retrace the decline from the previous year as the fundamental outlook for the U.K. picks up.

U.S. Dollar: Index To Threaten 61.8% Fib, Fundamentals To Have Greater Impact

The greenback rallied across the board on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,882, and the reserve currency may appreciate further over the near-term should the flight to safety gather pace. Nevertheless, as we’re expecting to see more positive data coming out of the world’s largest economy next week, we may see a rebound in risk sentiment, but we may see the fundamentals play an increased role in driving price action for the USD as the Fed talks down speculation for another round of quantitative easing. As the USDOLLAR carves out a higher low, we should see the index make a run at the 61.8% Fib (9,949) in the following week, and the bullish sentiment underlining the dollar may gather pace throughout the first-half of the year as the central bank continues 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.

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