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Euro At Risk Amid Greek Default, Dovish ECB – Sterling Holds Range

Euro At Risk Amid Greek Default, Dovish ECB – Sterling Holds Range

2012-03-07 14:15:00
David Song, Currency Strategist
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Talking Points

  • Euro: Greek PSI Talks Take Center Stage, ECB To Maintain Dovish Tone
  • British Pound: BoE Sees Stronger Recovery, 50-Day SMA Key Level To Watch
  • U.S. Dollar: Index Advances To Fresh Monthly High As Flight To Safety Picks Up

Euro: Greek PSI Talks Take Center Stage, ECB To Maintain Dovish Tone

The Euro pared the overnight advance to 1.3163 as Greece struggles to secure a debt deal ahead of the deadline on Thursday, and the single currency may weaken further over the next 24-hours of trading should the European Central Bank strike a dovish tone for monetary policy. Although German Chancellor Angela Merkel’s Cabinet approved the new EU fiscal pact, fears of a Greece default continues to drag on market sentiment, and the EURUSD may continue to track lower during the North American trade as European policy makers struggle to restore investor confidence.

Indeed, the ECB is widely expected to keep the benchmark interest rate on hold in March after conducting the second Long Term Refinancing Operation, but we may see President Mario Draghi talk up speculation for lower borrowing costs as the fundamental outlook for the euro-area deteriorates. As the region remains at risk of facing a prolonged recession, the central bank head may lay the ground works to ultimately push the interest rate below 1.00% in an effort to stem the downside risks for growth and inflation. As the EURUSD struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, the 50-Day SMA (1.3076) may give out going into the end of the week, but headlines coming out of Europe could produce whipsaw-like price action in the euro-dollar as the Greek PSI talk takes center stage. In turn, we may see the EURUSD continue to retrace the rebound from the beginning of the year, which would expose the 2.6% Fib around 1.2630-50.

British Pound: BoE Sees Stronger Recovery, 50-Day SMA Key Level To Watch

The British Pound pared the sharp decline from earlier this week, with the GBPUSD advancing to an overnight high of 1.5758, but the lack of momentum to hold above the 38.2% Fib from the 2009 low to high (1.5730-50) threatens the range-bound price action carried over from the previous month as we continue to monitor the downward trend in the relative strength index. Nevertheless, we saw Bank of England board member Spencer Dale strike an improved outlook for the U.K. as he expects to see a more robust recovery later this year, and went onto say that the slower rate of inflation should help to encourage private sector consumption as it alleviates the squeeze in disposable income. As the BoE sees a diminishing risk of undershooting the 2% target for inflation, it seems as though the central bank will look to conclude its easing cycle in 2012, and the shift in the policy outlook may continue to prop up the sterling as market participants scale back speculation for more quantitative easing. Nevertheless, it is imperative that the GBPUSD continues to trade above the 50-Day SMA (1.5665) to preserve the range carried over from the previous month, and the exchange rate may continue to track sideways over the near-term as investors look forward to the BoE minutes due out on March 21.

U.S. Dollar: Index Eyes 61.8% Fib, Labor Market Improves Further In February

We saw the greenback consolidate on Wednesday, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging an overnight low of 9,909, but it looks as though the reserve currency is regaining its footing going into the North American trade as fears surrounding the global economy bears dampens risk-taking behavior. However, as the U.S. equity market opens slightly higher, it seems as though the rise in the ADP employment report is helping to shore up market sentiment, but we may see the greenback appreciate over the remainder of the week as the improving outlook for the world’s largest economy saps speculation for another round of quantitative easing. In turn, we may see the USDOLLAR make a run at the 61.8% Fib around 9,949, and we will maintain a bullish outlook for the greenback as the Federal Reserve continues to scale back 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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Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

NZD

20:00

15:00

Reserve Bank of New Zealand Interest Rate Decision

2.50%

2.50%

NZD

21:45

16:45

Manufacturing Activity (4Q)

--

0.0%

NZD

21:45

16:45

Manufacturing Activity Volume s.a. (QoQ) (4Q)

--

-1.4%

Currency

GMT

Release

Expected

Actual

Comments

AUD

22:30

AiG Performance of Construction Index (FEB)

--

35.6

Lowest since October.

JPY

23:50

Official Reserve Assets (FEB)

--

$1302.9B

Falls back from a record-high.

GBP

0:01

BRC Shop Price Index (YoY) (FEB)

--

1.2%

Slowest pace of growth since November 2009.

AUD

0:30

Gross Domestic Product (QoQ) (4Q)

0.8%

0.4%

Growth may slow further as trade falters.

AUD

0:30

Gross Domestic Product (YoY) (4Q)

2.4%

2.3%

JPY

5:00

Leading Index (JAN P)

95.0

94.9

Highest since July 2011.

JPY

5:00

Coincident Index (JAN P)

93.4

93.1

AUD

5:30

Foreign Reserves (Australian dollar) (FEB)

--

49.1B

Largest since August 2009.

CHF

6:45

Unemployment Rate s.a. (FEB)

3.1%

3.1%

Holds steady for third month.

CHF

6:45

Unemployment Rate (FEB)

3.4%

3.4%

CHF

8:00

Foreign Currency Reserves (FEB)

--

224.9B

Narrows for second month.

EUR

11:00

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

0.6%

-2.7%

Declines for the third time in the last six months.

EUR

11:00

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

-1.7%

-4.9%

USD

12:00

MBA Mortgage Applications (MAR 2)

--

-1.2%

Falls for third week.

USD

13:15

ADP Employment Change (FEB)

215K

216K

Tops 200K for third time in the last six months.

CAD

13:30

Building Permits (MoM) (JAN)

-3.2%

-12.3%

Largest decline since April 2011.

USD

13:30

Non-Farm Productivity (4Q F)

0.8%

0.9%

Expands for second straight quarter.

USD

13:30

Unit Labor Costs (4Q F)

1.2%

2.8%

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