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Euro Formation Foreshadows Key Break, Sterling Rally To Gather Pace

Euro Formation Foreshadows Key Break, Sterling Rally To Gather Pace

2012-04-30 13:10:00
David Song, Strategist
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Talking Points

  • Euro: Spain Faces Double-Dip Recession, Triangle Continues To Take Shape
  • British Pound: Clears 23.6% Fib, RSI Bouncing Around 70
  • U.S. Dollar: Advances On Risk-Aversion, Inflationary Concerns Come To Light

Euro: Spain Faces Double-Dip Recession, Descending Triangle Continues To Take Shape

The Euro slipped to 1.3207 as Spain contracted another 0.3% in the first-quarter of 2012, and the EURUSD should track lower going into May as the fundamental outlook for the region continues to deteriorate. At the same time, we saw the CPI Estimate slow to 2.6% in April from 2.7% the month prior, and the weakening outlook for growth and inflation may lead the European Central Bank to ease policy further as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

According to Credit Suisse overnight index swaps, market participants are starting to price a rate cut over the next 12-months, and we may see the ECB President Mario Draghi target the benchmark interest rate in the second-half of the year as the non-standard measures have a limited impact in addressing the risks for the region. As the EURUSD continues to approach the apex of the descending triangle, we will preserve our bearish outlook for the pair, and we may see the euro-dollar continue to consolidate ahead of the ECB rate decision on tap for later this week as currency traders weigh the outlook for monetary policy. Should the Governing Council sound increasingly dovish this time around, speculation for more easing would spark a bearish reaction in the exchange rate, but we would need to see a break and a close below 1.3000 for a move back down to the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.

British Pound: Clears 23.6% Fib, RSI Bouncing Around 70

The British Pound fell back from a fresh yearly high of 1.6300 amid the shift in risk sentiment, but the sterling may continue to track higher in May as interest rate expectations gather pace. Indeed, there’s speculation that the Bank of England could be forced to do more as the U.K. faces a double-dip recession, but it seems as though the Monetary Policy Committee will continue to move away from its easing cycle as central bank officials anticipate to see a stronger recovery in the second-half of the year. As the BoE changes its tune, the less dovish tone held by the central bank should prop up the sterling throughout 2012, and the GBPUSD may continue to retrace the decline from last April as it clears the 23.6% Fib from the 2009 low to high around 1.6250.

U.S. Dollar: Advances On Risk-Aversion,Inflationary Concerns Come To Light

The greenback bounced back on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of9,843, and the reserve currency may continue to recoup the losses from the previous week as it benefits from safe-haven flows. Nevertheless, the economic docket continue to show increasing price pressures in the world’s largest economy, with wage growth advancing 0.4% in March while the Core Personal Consumption Expenditure Index climbed an annualized 2.0% to mark the fastest pace of growth since November 2008, and the heightening risk for inflation may encourage the Federal Reserve to draw up a tentative exit strategy as the economic recovery gradually gathers pace. In turn, the bearish sentiment surrounding the dollar may be short-lived, and we should see the FOMC continue to soften its dovish rhetoric for monetary policy as growth and inflation pick up.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:45

09:45

Chicago Purchasing Manager

60.50

62.20

USD

14:00

10:00

NAPM-Milwaukee

53.00

51.80

USD

14:30

10:30

Dallas Fed Manufacturing Activity

8.00

10.80

NZD

22:45

18:45

Private Wages ex Overtime (QoQ)

0.6%

0.7%

NZD

22:45

18:45

Labor Cost Private Sector (QoQ)

0.5%

0.7%

NZD

22:45

18:45

Average Hourly Earnings (QoQ)

0.0%

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:45

Building Permits (MoM) (MAR)

6.0%

19.8%

Biggest rise since August.

NZD

22:45

Trade Balance (NZ$) (MAR)

417M

134M

Surplus narrows as imports rose the most since November.

NZD

22:45

Exports (NZ$) (MAR)

4.37B

4.22B

NZD

22:45

Imports (NZ$) (MAR)

3.95B

4.08B

NZD

22:45

Trade Balance 12mth (YTD) (NZ$) (MAR)

501M

207M

GBP

23:01

Hometrack Housing Survey (YoY) (APR)

--

-0.9%

Rises for the second month.

GBP

23:01

Hometrack Housing Survey (MoM) (APR)

--

0.1%

CNY

23:44

China Leading Index (MAR)

--

100.52

Lowest since December.

AUD

00:30

TD Securities Inflation (MoM) (APR)

--

0.3%

Rises for the first time since December,

AUD

00:30

TD Securities Inflation (YoY) (APR)

--

1.9%

NZD

01:00

NBNZ Activity Outlook (APR)

--

36.1

Highest since July.

NZD

01:00

NBNZ Business Confidence (APR)

--

35.8

AUD

01:00

HIA New Home Sales (MoM) (MAR)

--

-9.4%

Largest decline since May 2006.

AUD

01:30

Private Sector Credit (YoY) (MAR)

3.2%

3.4%

Slowest pace of growth since September.

AUD

01:30

Private Sector Credit (MoM) (MAR)

0.3%

0.4%

NZD

03:00

Money Supply M3 (YoY) (MAR)

--

5.0%

Lowest since September.

EUR

07:00

Spanish GDP Constant SA (YoY) (1Q)

-0.6%

-0.4%

Contracts for the second time.

EUR

07:00

Spanish GDP Constant SA (QoQ) (1Q)

-0.4%

-0.3%

EUR

08:00

Euro-Zone M3 s.a. (3M) (MAR)

2.7%

2.8%

Fastest pace of growth since June 2009.

EUR

08:00

Euro-Zone M3 s.a. (YoY) (MAR)

2.8%

3.2%

EUR

09:00

Euro-Zone Consumer Price Index Estimate (YoY) (APR)

2.5%

2.6%

Holds steady for second month.

EUR

09:00

Italy CPI - EU Harmonized (MoM) (APR P)

0.8%

0.9%

Grows 3.8% for the second straight month.

EUR

09:00

Italy CPI - EU Harmonized (YoY) (APR P)

3.6%

3.8%

CAD

12:30

Gross Domestic Product (MoM) (FEB)

0.2%

-0.2%

Contracts for the first time since November.

CAD

12:30

Gross Domestic Product (YoY) (FEB)

2.1%

1.6%

CAD

12:30

Industrial Product Price (MoM) (MAR)

0.0%

0.2%

Rises for third month.

CAD

12:30

Raw Materials Price Index (MoM) (MAR)

0.3%

-1.6%

Falls for second month.

USD

12:30

Personal Income (MAR)

0.3%

0.4%

Biggest rise since December.

USD

12:30

Personal Spending (MAR)

0.4%

0.3%

Rises for the fourth month.

USD

12:30

Personal Consumption Expenditure Deflator (MoM) (MAR)

0.3%

0.2%

Core rate advances at the fastest pace since November 2008.

USD

12:30

Personal Consumption Expenditure Core (YoY) (MAR)

2.0%

2.0%

USD

12:30

Personal Consumption Expenditure Deflator (YoY) (MAR)

2.2%

2.1%

USD

12:30

Personal Consumption Expenditure Core (MoM) (MAR)

0.2%

0.2%

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