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Euro Dampened By Deepening Recession, Bearish Formation In Focus

Euro Dampened By Deepening Recession, Bearish Formation In Focus

David Song, Strategist

Talking Points

  • Euro: Germany May Contract in Fourth Quarter, Bearish Setup Still In Play
  • British Pound: RSI Continues To Find Support, Eyes 23.6% Fib
  • U.S. Dollar: Continues To Benefit From Risk Aversion, Fed’s Pianalto On Tap

Euro: Germany May Contract in Fourth Quarter, Bearish Setup Still In Play

The Euro advanced to 1.3075 even as the Bundesbank warned that Germany, Europe’s largest economy, may contract in the fourth quarter, but the downward revision in the growth forecast instills a bearish outlook for the single currency as the monetary union faces a deepening recession.

Indeed, Germany’s central bank scaled back its fundamental assessment for the remainder of the year amid the ‘uncertainty stemming from the sovereign debt crisis,’ and the weakening outlook for the region may push the European Central Bank to provide additional monetary support in an effort to stem the downside risks for the euro economy.

Meanwhile, Greek Labor Minister Ioannis Vroutsis said the nation is a step closer in securing its next bailout payment as the coalition government convenes in Athens to nail out the final details to the EUR 13.5B austerity program, but we may see the periphery country seek further assistance as it looks for a two-year extension in meeting its budget target.

As European policy makers maintain a reactionary approach in addressing the debt crisis, the heightening threat for contagion continued to dampen the fundamental outlook for the region, and we will preserve a bearish outlook for the EURUSD as the pair continues to carve a double-top around the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120. As the reversal pattern takes shape, we should see the exchange rate fall back towards the 23.6% Fib around 1.2640-50, and the euro may ultimately give back the rebound from the yearly low (1.2041) as we anticipate the ECB to embark on its easing cycle throughout the near to medium-term.

British Pound: RSI Continues To Find Support, Eyes 23.6% Fib

The British Pound pared the decline from the previous week, with the GBPUSD advancing to an overnight high of 1.6051, and we may see the sterling recoup the losses carried over from the previous month as the economic docket is expected to show the U.K. emerging from the double-dip recession.

As the advanced GDP report is expected to show the British economy expanding 0.6% in the third-quarter, the rebound in growth should prop up the sterling, and a positive development may encourage a bullish forecast for the GBPUSD as it dampens speculation for additional monetary support.

As the region returns to growth, the Bank of England should continue to strike a more neutral tone for monetary policy, and we may see the Monetary Policy Committee slowly move away from its easing cycle as the central bank scales back its forecast for undershooting the 2% target for inflation.

As the relative strength index on the GBPUSD continues to find support around the 43 figure, the pound-dollar may continue to track higher ahead of the growth report, and the sterling may make another run at the 23.6% Fib from the 2009 low to high around as market participants scale back bets for more quantitative easing.

U.S. Dollar: Continues To Benefit From Risk Aversion, Fed’s Pianalto On Tap

The greenback extended the advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,928, and the reserve currency may track higher throughout the North American trade as market sentiment falters.

Although the economic docket remains fairly light for Monday, the slew of central bank rhetoric may encourage risk-taking behavior as world officials preserve a dovish tone for monetary policy. As Cleveland Fed President Sandra Pianalto, who also serves on the FOMC this year, sees the new QE program having a limited impact on the real economy, the board member may favor keeping the benchmark interest rate near zero for an extended period of time, and we may see the committee continue to rely on its transmission mechanisms to encourage private sector activity as the ballooning budget deficit comes under increased criticism.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

13:30

9:30

ECB's Erkki Liikanen Speaks on EU Banking Standards

EUR

16:00

12:00

ECB's Ewald Nowotny Speaks on Banking Supervision

EUR

17:00

13:00

EU Votes On Yves Mersch ECB Nomination

USD

17:30

13:30

Fed's Sandra Pianalto Speaks on U.S. Economy

--- 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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