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EUR Bearish Outlook Reinforced By ECB, GBP Still Needs To Test 1.6000

EUR Bearish Outlook Reinforced By ECB, GBP Still Needs To Test 1.6000

2012-05-03 14:55:00
David Song, Strategist
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Talking Points

  • Euro: ECB Maintains Balanced Tone, Preserves Easing Cycle
  • British Pound: Correction To Gather Pace, BoE Rate Decision Comes Into Focus
  • U.S. Dollar: Advances Ahead Of NFPs, FOMC To Adopt Hawkish Tone

Euro: ECB Maintains Balanced Tone, Preserves Easing Cycle

The Euro bounced back from an overnight low of 1.3096 as the ECB held the benchmark interest rate at 1.00% and talked down speculation for additional monetary support, but it seems as though the Governing Council will carry its easing cycle into the following year as it remains premature for the central bank to embark on an exit strategy. Indeed, ECB President Mario Draghi tried to talk down the risks surrounding the region as the central bank expects to see a gradual recovery across the region, but warned that the fundamental outlook for the region has become increasingly uncertain amid the ongoing turmoil in the financial system.

Based on the recent comments, it seems as though the Governing Council remains open to expand monetary policy further in the second-half of the year, and we should see the central bank take additional steps to shore up the ailing economy as the risk for inflation remains ‘broadly balanced.’ As the region continues to face a risk for a prolonged recession, the slowing recovery could dampen price growth throughout 2012, and the weakening outlook for the region continues to reinforce a bearish outlook for the single currency as European policy makers maintain a reactionary approach in addressing the risks surrounding the region. As the EURUSD continues to approach the apex of the descending triangle, we are still waiting for a break of 1.3000 for a larger move to the downside, and we will look to sell rallies in the euro-dollar as the fundamental outlook for the region turns increasingly bleak.

British Pound: Correction To Gather Pace, BoE Rate Decision Comes Into Focus

The British Pound continued to consolidate on Thursday, with the GBPUSD slipping to an overnight low of 1.6158, and the short-term correction should gather pace in the days ahead as the relative strength index continues to come off of overbought territory. However, as the Bank of England decision on tap for May 10 comes into focus, the fresh batch of comments from the central bank should prop up the sterling, and we may see the GBPUSD fall back towards 1.6000 – former resistance – before it resumes the upward trend from earlier this year. As we see the BoE moving away from its easing cycle, the shift in the policy outlook should prop up the British Pound, and we expect to see fresh yearly highs in the GBPUSD as the Monetary Policy Committee sees an increased risk for inflation.

U.S. Dollar: Advances Ahead Of NFPs, FOMC To Adopt Hawkish Tone

The greenback tracked higher ahead of the highly anticipated Non-Farm Payrolls report, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a high of 9,923, and the reserve currency may continue to retrace the decline from the previous month should we see a marked improvement in the labor market. Indeed, the drop in initial and continuing jobless claims certainly bodes well for NFP’s, and a strong print could spark a sharp rally in the greenback as it dampens expectations for another round of quantitative easing. In turn, we should see the FOMC sound more hawkish going into the second-half of the year, and the committee may start to outline a tentative exit strategy as the more robust recovery raises the risk for inflation.

--- 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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