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Forex: EUR Weighed By Rate Expectations- GBP To Steady Ahead Of BoE

Forex: EUR Weighed By Rate Expectations- GBP To Steady Ahead Of BoE

David Song, Strategist

Talking Points

  • Euro: ECB Sees Return To Growth In 2013, Unemployment Hits Record High
  • British Pound: BoE To Maintain Current Policy, Drop Dovish Tone

Euro: ECB Sees Return To Growth In 2013, Unemployment Hits Record High

The Euro climbed to a fresh monthly high of 1.3026 as European Central Bank (ECB) President Mario Draghi pledged to do whatever it takes to save the single currency, but short-term rally in the EURUSD could be coming to an end should the relative strength index continue to find resistance around the 66 figure.

Mr. Draghi sounded rather upbeat ahead of the December 6 meeting and said the region is expected to return to growth in the second-half of 2013, but we anticipate the Governing Council to carry its easing cycle into the following year as the debt crisis continues to drag on the real economy. As unemployment in the euro-area climbs to a fresh record-high of 11.7%, fears of a deepening recession may encourage the Governing Council to ease monetary policy further, and we may see a growing number of ECB officials show a greater willingness to target the benchmark interest rate as the economic downturn dampens the outlook for price stability.

As the ECB interest rate decision competes as one of the biggest event risk for the following week, headlines surrounding Greece’s bond-buyback program may do little to prop up the euro, and we may see the EURUSD turnover in the coming days as it appears to have carved out a near-term top in November. As the euro-dollar fails to put in a close above the 1.3000 figure, we should see the RSI continue to come off of interim resistance, and we may see a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 should the ECB look to carry its easing cycle into the following year.

British Pound: BoE To Maintain Current Policy, Drop Dovish Tone

The British Pound gave back the overnight advance to 1.6061 to maintain the range-bound price action from earlier this week, but the sterling could be coiling up for a larger move to the upside as the Bank of England (BoE) drops its dovish tone for monetary policy.

Indeed, the BoE is widely expected to maintain its current policy next week as the U.K. emerges from the double-dip recession, but we may see the Monetary Policy Committee refrain from releasing a policy statement at the December 6 meeting as they continue to endorse a wait-and-see approach. However, the BoE Minutes due out on December 19 is likely to sound more hawkish this time around as the central bank sees above-target inflation over the next two-years, and a shift in central bank rhetoric should prop up the sterling as market participants scale back bets fore more quantitative easing.

In turn, the GBPUSD could be setting up for another run at the 23.6% Fib from the 2009 low to high around 1.6200, and we may see the British Pound outperform in 2013 as the BoE appears to be slowly moving away from its easing cycle.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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