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Forex: Euro Weighed By Bets For ECB Rate Cut- Further Losses Ahead

Forex: Euro Weighed By Bets For ECB Rate Cut- Further Losses Ahead

David Song, Strategist

Talking Points

  • Euro: ECB Lowers Inflation Forecast, Discusses Rate Cut
  • British Pound: BoE Maintains Current Policy, All Eyes On Meeting Minutes
  • U.S. Dollar: Struggles Ahead Of NFPs- Job Growth To Slow

Euro: ECB Lowers Inflation Forecast, Discusses Rate Cut

The Euro weakened to 1.3024 as there was a wide discussion for a rate cut at the European Central Bank’s (ECB) December meeting, and it seems as though the Governing Council will continue to embark on its easing cycle in the following year as the deepening recession threatens price stability.

Although the Governing Council kept the benchmark interest rate a 0.75%, the central bank lowered its 2013 inflation to 0.6% - 2.2% amid the weakening outlook for growth, and we may see a growing number of ECB officials show a greater willingness to push the benchmark interest rate to a fresh record-low as the debt crisis continues to drag on the real economy.

Indeed, President Draghi tried to shift the burden onto the EU and put greater emphasis in take the appropriate steps to improve public finances, but it seems as though the ECB will have little choice but to expand monetary policy further as the governments operating under the single currency become increasingly reliant on external support.

As the relative strength index on the EURUSD continues to come off of overbought territory, the pullback from 1.3125 should gather pace going into the end of the year, and we will maintain a bearish forecast for the Euro as the fundamental outlook for the region turns increasingly bleak. In turn, we may see the euro-dollar establish a downtrend going into 2013, and we will look for another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the ECB turns increasingly dovish.

British Pound: BoE Maintains Current Policy, All Eyes On Meeting Minutes

The British Pound regained its footing on Thursday, with the GBPUSD advancing to a high of 1.6127, but the sterling may face range-bound prices ahead of the Bank of England (BoE) Minutes due out on December 19 as market participants weigh the outlook for monetary policy.

Indeed, the BoE refrained from releasing a policy statement as the central bank kept the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, but the policy statement may show the Monetary Policy Committee (MPC) slowly moving away from its easing cycle as inflation stubbornly holds above the 2% target. As the U.K. emerges from the double-dip recession, sticky price growth may encourage the BoE to switch gears in 2013, and the central bank may sound more hawkish going into the following year as the region gets on a more sustainable path.

As the BoE carries its wait-and-see approach into the New Year, we’re seeing the relative strength index on the GBPUSD preserve the upward trend carried over from previous month, and the pair looks poised to make another run at the 23.6% Fibonacci retracement from the 2009 low to high around 1.62000 as market participants scale back expectations for additional monetary support.

U.S. Dollar: Struggles Ahead Of NFPs- Job Growth To Slow

The greenback gave back the rebound from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,937, and the reserve currency may continue to consolidate ahead of the highly anticipated Non-Farm Payrolls report as job growth is expected to slow in November.

Employment in the world’s largest economy is expected to increase another 86K after expanding 171K in October, and the protracted recovery in the labor market may fuel speculation for additional monetary support as the Fed keeps the door open to expand its balance sheet further.

However, as the Fed takes note of the more broad-based recovery, the resilience in private sector consumption along with the budding recovery in the housing market may keep the FOMC on the sidelines, and we may see the committee carry its current policy into the following year as the outlook for growth and inflation picks up.

FX Upcoming










Ivey Purchasing Managers Index s.a. (NOV)





Bank of Canada Releases Financial System Review




Household Change in Net Worth (3Q)





AiG Performance of Construction Index (NOV)


--- Written by David Song, Currency Analyst

To contact David, e-mail 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

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