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Bearish Euro Formation In Focus, British Pound Searching For Support

Bearish Euro Formation In Focus, British Pound Searching For Support

2012-05-02 13:25:00
David Song, Strategist
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Talking Points

  • Euro: ECB To Strike Dovish Tone Amid Risk For Prolonged Recession
  • British Pound: Correction Underway, Outlook Remains Bullish On BoE
  • U.S. Dollar: Index Testing 9,900, Fed’s Lacker On Tap

Euro: ECB To Strike Dovish Tone Amid Risk For Prolonged Recession

The Euro slipped to a fresh weekly low of 1.3120 as the weakening labor market paired with the drop in manufacturing raised the risk for a prolonged recession, and the EURUSD may continue to retrace the rebound from the previous month as the sovereign debt crisis continues to drag on the real economy. Indeed, Portugal auctioned EUR 1B in 12-month bills yielding 3.908%, which compares to the 3.652% offered back in March, and we may see the European Central Bank sound a bit more dovish this time around as the fundamental outlook for the region turns increasingly bleak.

Although the ECB is widely expected to maintain its current policy stance in May, central bank President Mario Draghi may look to target the benchmark interest rate as the non-standard measures have a limited impact in addressing the risks for the region, and we may see the Governing Council carry its easing cycle into the second-half of the year as the governments operating under the single currency become increasingly reliant on monetary support. As the EURUSD carves out a series of lower highs in April, we will stick by our bearish forecast for the pair, and we are still looking for a sharp selloff in the exchange rate as price action continues to approach the apex of the descending triangle. In turn, we need a meaningful break and a close below 1.3000 to see the bearish formation pan out, and we should see the euro-dollar fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as European policy makers struggle to address the risks surrounding the region.

British Pound: Correction Underway, Outlook Remains Bullish On BoE

The British Pound extended the decline from the previous day as market participants scaled back their appetite for risk, and the short-term correction in the GBPUSD may gather pace over the remainder of the week as the relative strength index continues to come off overbought territory. However, as the economic recovery in the U.K. gradually gathers pace, we should see the Bank of England continue to move away from its easing cycle, and we are looking for fresh yearly highs in the GBPUSD as the pair maintains the upward trend from earlier this year. As BoE Governor Mervyn King is scheduled to speak later today, hawkish comments from the central bank head should prop up the sterling, but the GBPUSD may continue to fall back towards former resistance around 1.6000 as it searches for support.

U.S. Dollar: Index Testing 9,900, Fed’s Lacker On Tap

The greenback continued to retrace the decline from the previous month, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,902, and the reserve currency may appreciate further during the North American trade as the flight to safety gathers pace. As the economic docket remains fairly light for the remainder of the day, we should see risk trends dictate price action across the major currencies, but the fresh batch of comments from Richmond Fed President Jeffery Lacker may spark a bullish reaction in the greenback as the FOMC board member adopts a hawkish tone for monetary policy. As the Fed raises its outlook for growth and inflation, we should see the central bank discuss a tentative exit strategy, and the committee may see scope to start to normalize monetary policy towards the end of the year as the recovery gathers 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.

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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Factory Orders

-1.70%

1.30%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories

3978K

USD

14:30

10:30

DOE Cushing OK Crude Inventory

574K

USD

14:30

10:30

DOE U.S. Distillate Inventory

-3052K

USD

14:30

10:30

DOE U.S. Gasoline Inventories

-2235K

USD

16:30

12:30

Fed's Lacker Speaks on Economy in Norfolk

EUR

17:00

13:00

Italian Budget Balance (euros) (YTD)

-28.2B

EUR

17:00

13:00

Italian Budget Balance (euros)

-17.5B

NZD

22:45

18:45

Unemployment Rate

6.20%

6.30%

NZD

22:45

18:45

Employment Change (QoQ)

0.50%

0.10%

NZD

22:45

18:45

Employment Change (YoY)

0.90%

1.60%

NZD

22:45

18:45

Participation Rate (QoQ)

68.30%

68.20%

Currency

GMT

Release

Expected

Actual

Comments

NZD

01:00

ANZ Commodity Price (APR)

--

-4.5%

Falls for second month.

JPY

01:30

Labor Cash Earnings (YoY) (MAR)

0.2%

1.3%

Largest advance since July 2010.

CNY

02:30

HSBC Manufacturing PMI (APR)

--

49.3

Contracts for the sixth month.

CHF

07:30

SVME-Purchasing Managers Index (APR)

51.0

46.9

Lowest print since November.

EUR

07:45

Italian Purchasing Manager Index Manufacturing (APR)

47.1

43.8

Contracts for the second month.

EUR

07:50

French Purchasing Manager Index Manufacturing (APR F)

47.3

46.9

EUR

07:55

German Purchasing Manager Index Manufacturing

46.3

46.2

EUR

07:55

German Unemployment Change (APR)

-10K

19K

Rises for the second time this year.

EUR

07:55

German Unemployment Rate s.a. (APR)

6.7%

6.8%

EUR

08:00

Italy Unemployment Rate (SA) (MAR P)

9.4%

9.8%

Highest since 2000.

EUR

08:00

Euro-Zone Purchasing Manager Index Manufacturing (APR)

46.0

45.9

Lowest since June 2009.

GBP

08:30

Purchasing Manager Index Construction (APR)

54.0

55.8

Slows for the first time since January.

GBP

08:30

Mortgage Approvals (MAR)

48.0K

49.9K

Holds below 50K for the second month.

GBP

08:30

Net Consumer Credit (MAR)

0.3B

0.4B

GBP

08:30

Net Lending Sec. on Dwellings (MAR)

1.0B

1.0B

GBP

08:30

M4 Money Supply (MoM) (MAR)

--

-0.8%

Contracts for the second straight month.

GBP

08:30

M4 Money Supply (YoY) (MAR)

--

-5.0%

GBP

08:30

M4 Ex IOFCs 3M Annualised (MAR)

--

6.4%

EUR

09:00

Euro-Zone Unemployment Rate (MAR)

10.9%

10.9%

Rises to a 15-year high.

EUR

09:00

Italy Producer Price Index (MoM) (MAR)

0.6%

0.3%

Slowest pace of growth since March 2010.

EUR

09:00

Italy Producer Price Index (YoY) (MAR)

3.0%

2.7%

USD

11:00

MBA Mortgage Applications (APR 27)

--

0.1%

Rises for the second time in April.

USD

12:15

ADP Employment Change (APR)

170K

119K

Smallest advance since September.

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