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Euro At Risk Amid Fears Of Prolonged Recession, Pound To Outperform

Euro At Risk Amid Fears Of Prolonged Recession, Pound To Outperform

David Song, Strategist

Talking Points

  • Euro: Weighed By Fears Of Prolonged Recession, Remains Capped By 1.3400
  • British Pound: Eyes 23.6% Fib Ahead Of BoE Rate Decision

Euro: Weighed By Fears Of Prolonged Recession, Remains Capped By 1.3400

The Euro weakened to 1.3314 on Monday as the 14-year high jobless rate heightened concerns for a prolonged recession, and the single currency may continue to give back the advance from the previous month as the fundamental outlook for the region turns increasingly bleak. At the same time, Italian Prime Minister Mario Monti said the new government considered tapping the region’s rescue fund amid the turmoil in the financial system, and the ongoing risk for contagion reinforces our bearish forecast for the Euro as the sovereign debt crisis continues to drag on the economy.

As the EU makes a greater push to balance its public finances, the major shift in fiscal policy certainly dampens the outlook for growth, and we may see the European Central Bank continue to shore up the region as the governments operating under the single currency become increasingly reliant on monetary support. Although the ECB is widely expected to keep the benchmark interest rate at 1.00% later this week, President Mario Draghi may talk up speculation for a potential rate cut, and a dovish policy statement could threaten the range-bound price action in the EURUSD as the central bank looks to extend its easing cycle. As the EURUSD marks another failed run at 1.3400, the pair looks poised for a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, but we are likely to see the euro face additional headwinds throughout the year as European policy makers struggle to swiftly address the risks surrounding the region.

British Pound: Eyes 23.6% Fib Ahead Of BoE Rate Decision

The British Pound fell back from a fresh yearly high of 1.6062 amid the shift in market sentiment, but the GBPUSD looks poised to make another run at the 23.6% Fib from the 2009 low to high around 1.6250 as the fundamental outlook for the U.K. improves. Although we have the Bank of England interest rate decision on tap for later this week, the central bank is widely expected to maintain its current policy in April, and market participants may show a muted reaction to the event as the Monetary Policy Committee refrains from releasing a policy statement. As the upward trending channel from earlier this year continues to take shape, the recent weakness in the GBPUSD is likely to be short-lived, and we may see the sterling outperform throughout the year should the BoE look to conclude its easing cycle in 2012.

More to Follow...

--- 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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