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Forex Analysis: ECB Fails To Prop Up Euro- Further Easing Ahead

Forex Analysis: ECB Fails To Prop Up Euro- Further Easing Ahead

2012-11-08 14:10:00
David Song, Strategist
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Talking Points

  • Euro: ECB Keeps Interest Rate At 0.75%, Curbs Growth Outlook
  • British Pound: Continues To Build Short-Term Base As BoE Maintains Policy
  • U.S. Dollar: Struggles To Hold Ground Amid Rebound In Risk Sentiment

Euro: ECB Keeps Interest Rate At 0.75%, Curbs Growth Outlook

The Euro slipped to 1.2715 even as the European Central Bank (ECB) kept the benchmark interest rate at 0.75%, and the dovish tone held by central bank President Mario Draghi should continue to drag on the exchange rate as the Governing Council tries to combat the downside risks surrounding the region.

Indeed, ECB President Draghi struck a weakened outlook for the region after the EU lowered its economic forecast for 2013, and sees subdued growth in the following year as the region faces a deepening recession. Moreover, the central bank head argued that the pace of monetary expansion remains subdued as it struggles to repair the policy transmission channels, and we should see the Governing Council carry its easing cycle into the following year as growth and inflation falter.

As the double-top formation in the EURUSD continues to take shape, we should see the pair work its way back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and we will preserve our bearish forecast for the pair as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: Continues To Build Short-Term Base As BoE Maintains Policy

The British Pound pared the overnight decline to 1.5928 as the Bank of England (BoE) held the benchmark interest rate a 0.50% while keeping its asset purchase program at GBP 375B, and the sterling should track higher over the near-term as the central bank appears to be slowly moving away from its easing cycle.

Although the BoE refrained from releasing a policy statement, we should see the central bank soften its dovish tone for monetary policy as the U.K. emerges from the double-dip recession. As a growing number of central bank officials scale back their forecast for undershooting the 2% target for inflation, the Monetary Policy Committee (MPC) remains poised to carry its wait-and-see approach into the following year, and the BoE may start to discuss a tentative exit strategy in 2013 amid the stickiness in price growth.

As the GBPUSD appears to be caving out a short-term base above the 1.5900 figure, we should see the pair retrace the decline carried over from the previous month, and we anticipate another run at 1.6200 – the 23.6% Fibonacci retracement from the 2009 low to high – as market participants scale back bets for a further expansion in the BoE’s balance sheet.

U.S. Dollar: Struggles To Hold Ground Amid Rebound In Risk Sentiment

The greenback is struggling to hold its ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the overnight advance to 9,982, and the reserve currency may continue to consolidate over the next 24-hours of trading as market sentiment appears to be picking up.

As the economic docket remains fairly light for the reminder of the day, risk trends should dictate price action across the major exchange rates, but investor confidence may tail off going into the end of the week as headlines coming out of Europe continues to drag in trader sentiment.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

NZD

21:45

16:45

NZ Card Spending - Retail MoM

0.3%

-0.6%

NZD

21:45

16:45

NZ Card Spending (MoM)

-0.6%

JPY

23:50

18:50

Japan Money Stock M3 (YoY)

2.0%

2.0%

JPY

23:50

18:50

Japan Money Stock M2+CD (YoY)

2.4%

2.4%

--- 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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