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Euro Relief Rally Offers Selling Opportunity, Pound Eyes Key 1.6250

Euro Relief Rally Offers Selling Opportunity, Pound Eyes Key 1.6250

2012-04-20 14:20:00
David Song, Strategist

Talking Points

  • Euro: IMF Contributions To Total $500B, More Calls For ECB Rate Cut
  • British Pound: Retail Sales Tops Forecast, 23.6% Fib In Sight
  • U.S. Dollar: FOMC Interest Rate Decision In Focus, Round Ahead

Euro: IMF Contributions To Total $500B, More Calls For ECB Rate Cut

The Euro rallied to 1.3222 as the International Monetary Fund looks to strengthen its lending capacity to further assist the European periphery, but we will stick with our bearish call for the EURUSD as the fundamental outlook for the region remains bleak. Indeed, European Union Monetary Affairs Commissioner Olli Rehn said China will increase its contributions to the IMF after meeting with China’s Vice Premier Wang Qishan, and the developments coming out of the Group of 20 meeting in Washington may continue to prop up the single currency European policy makers see commitments to the IMF rising up to $500B.

Meanwhile, French presidential candidate François Hollande argued that the ECB should implement further rate cuts to shore up the ailing economy, with World Bank President Robert Zoellick calling on the region to focus on growth, and we expect to see the Governing Council carry out its easing cycle throughout 2012 in an effort to stem the risk for a prolonged recession. As the bearish formation in the EURUSD continues to pan out, we may see the pair struggle to close above 1.3200, and the euro-dollar looks poised for a sharp decline as price action continues to approach the apex of the descending triangle.

British Pound: Retail Sales Tops Forecast, 23.6% Fib In Sight

The British Pound advanced to a fresh yearly high of 1.6130 following the upbeat retail sales report, and the recent strength behind the sterling should gather pace going into May as the fundamental outlook for the region improves. As the economic recovery in the U.K. gathers pace, we should see the Bank of England sound a bit more hawkish in the month ahead, and the Monetary Policy Committee may show an increased willingness to start normalizing monetary policy towards the end of 2012 amid the stickiness in underlying inflation. As the upward trending channel in the GBPUSD continues to play out, we are looking for a run to the 23.6% Fibonacci retracement from the 2009 low to high around 1.6250, and the British Pound outperform in the second-half of the year as the shift in the policy outlook props up interest rate expectations.

U.S. Dollar: FOMC Interest Rate Decision In Focus, Round Ahead

The greenback came under pressure on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 9,918, and the reserve currency may struggle to hold its ground throughout the North American trade as the rebound in market sentiment appears to be gathering pace. As the U.S. equity market extends the advance from the open, the risk in risk-taking behavior may continue to dampen the appeal of the greenback, but the reserve currency should track higher next week as we expect the Federal Open Market Committee to dampen expectations for more easing. As the FOMC rate decision comes into focus, we anticipate to see a less dovish policy statement amid expectations for a more robust recovery, and the central bank may ultimately raise its fundamental assessment for the world’s largest economy amid the resilience in private sector consumption.

--- 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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