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EUR Fundamentals Instill Bearish Forecast, GBP Outlook Hinges On BoE

EUR Fundamentals Instill Bearish Forecast, GBP Outlook Hinges On BoE

David Song, Strategist

Talking Points

  • Euro: Spain Bond Auction Misses Target, Second LTRO Having Limited Impact
  • British Pound: Inflation Remains Sticky, All Eyes On BoE Minutes
  • U.S. Dollar: Trading Heavy Ahead of Fed Chairman Bernanke Comments

Euro: Spain Bond Auction Misses Target, Second LTRO Having Limited Impact

The Euro struggled to hold its ground on Tuesday, with the EURUSD slipping to an overnight low of 1.3172, and the single currency may continue to give back the rebound from the previous week as the fundamental outlook for the region deteriorates. Although, Spain’s auctioned EUR 5.04 in bills with the lowest rate in nearly two-years, the sale fell short of the EUR 5.5B target, and it seems as though commercial banks across the region are looking to horde the cheap money made available by the European Central Bank as the region remains at risk for a prolonged recession.

Indeed, it seems as though the ECB’s second Long Term Refinancing Operations may not be having the desired effect as commercials curb demands for government debt, and Spain may find it increasingly difficult to tap the financial markets as the government softens its pledge to address its budget deficit. As Spanish Prime Minister Mariano Rajoy now looks to target a budget shortfall of 5.8% of GDP, which compares with the 4.4% previously agreed upon, it certainly seems as though European policy makers are becoming increasingly reliant on monetary support, and we may see the Governing Council continue to carry out its easing cycle in 2012 as the EU struggles to stem the risk for contagion. As the EURUSD maintains the range-bounce price action from earlier this month, we should see the head-and-shoulders top pan out over the near-term, but we are waiting for a close below 1.3000 to see the reversal pattern gather pace.

British Pound: Inflation Remains Sticky, All Eyes On BoE Minutes

The British Pound weakened to 1.5830 despite the stronger-than-expected U.K. inflation report, but we may see the sterling regain its footing ahead of the Bank of England Minutes as central bank softens its dovish tone for monetary policy. Indeed, the stickiness in inflation should prompt the BoE to endorse a wait-and-see approach and we may see Governor Mervyn King strike an improved outlook for the region as bank officials expect to see a more robust recovery this year. In turn, a less dovish statement could spark another run at 1.6000, and we may see the sterling outperform against its major counterparts as the Monetary Policy Committee edges closer to concluding its easing cycle. However, we are still keeping a close eye on the relative strength index as it maintains the downward trend carried over from the previous month, and we get a clearer directional bias over the next 24-hours of trading as the BoE Minutes highlight the biggest event risk for sterling.

U.S. Dollar: Trading Heavy Ahead of Fed Chairman Bernanke Comments

The greenback is struggling to hold its ground during the North American trade, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight advance to 10,011, but we may see the reserve currency regain its footing later today should Fed Chairman Ben Bernanke soften his dovish tone for monetary policy. As the central bank head takes note of the more robust recovery, we should see Mr. Bernanke talk down speculation for another large-scale asset purchase plan, and the shift in the policy outlook should prop up the dollar as interest rate expectations gather pace.

--- 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

16:45

12:45

Fed Chairman Ben Bernanke Speaks on U.S. Economy

--

--

USD

21:30

17:30

Fed's Narayana Kocherlakota Speaks on U.S. Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:00

Conference Board Leading Index (JAN)

--

1.1%

First advance since August.

EUR

07:00

German Producer Prices (MoM) (FEB)

0.5%

0.4%

Slowest pace of growth since August 2010.

EUR

07:00

German Producer Prices (YoY) (FEB)

3.2%

3.2%

CHF

08:15

Industrial Production (QoQ) (4Q)

2.6%

7.9%

Largest advance since 2Q 2008.

CHF

08:15

Industrial Production (YoY) (4Q)

-2.00%

-1.4%

GBP

09:30

Consumer Price Index (MoM) (FEB)

0.4%

0.6%

Slowest rate of inflation since November 2010, but the stickiness in price growth should lead the BoE to soften its dovish tone for monetary policy.

GBP

09:30

Consumer Price Index (YoY) (FEB)

3.3%

3.4%

GBP

09:30

Core Consumer Price Index (YoY) (FEB)

2.3%

2.4%

GBP

09:30

Retail Price Index (FEB)

239.40

239.9

GBP

09:30

Retail Price Index (MoM) (FEB)

0.6%

0.8%

GBP

09:30

Retail Price Index (YoY) (FEB)

3.5%

3.7%

GBP

09:30

Retail Price Index Ex Mort Int.Payments (YoY) (FEB)

3.6%

3.8%

GBP

11:00

CBI Trends Total Orders (MAR)

-5.00

-8.00

Prices highest since May.

GBP

11:00

CBI Trends Selling Prices (MAR)

13.00

24.00

USD

12:30

Housing Starts (FEB)

700K

698K

Falls back from a three-year high.

USD

12:30

Housing Starts (MoM) (FEB)

0.1%

-1.1%

USD

12:30

Building Permits (FEB)

686K

717K

Highest in more than a year.

USD

12:30

Building Permits (MoM) (FEB)

0.6%

5.1%

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

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