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Forex: Euro Weakness to Accelerate- Pound Threatens Bullish Trend

Forex: Euro Weakness to Accelerate- Pound Threatens Bullish Trend

David Song, Strategist

Talking Points

  • Euro: Germany to Contract 0.5% in 4Q, Correction Underway
  • British Pound: Core Inflation Slows, U.K. Credit Rating ‘Under Threat’

Euro: Germany to Contract 0.5% in 4Q, Correction Underway

The Euro tumbled to a low of 1.3312 as Germany’s Federal Statistics Office warned that Europe’s largest economy may have contracted 0.5% during the final three-months of 2012, and the deepening recession in the euro-area should continue to weigh on the exchange rate as the European Central Bank (ECB) keeps the door open to lower the benchmark interest rate further.

Although the ECB sees the economy returning to growth later this year, record-high unemployment along with the ongoing weakness in the periphery countries may prompt the central bank to embark on its easing cycle throughout the remainder of the year as the economic downturn threatens price stability. Indeed, Fitch Ratings said that the ECB’s bond buying program has certainly helped to buy more time in addressing the risks surrounding the region, but we should see the Governing Council take additional steps to shore up the ailing economy as fears surrounding the sovereign debt crisis start to abate.

However, as European policy makers preserve a reactionary approach in tackling the downside risks for the region, the wait-and-see approach held by the ECB may ultimately lead to a protracted recovery, and the short-term pullback in the EURUSD looks poised to turn into a larger correction as the rebound remains overbought.

As the relative strength index on the EURUSD falls back from a high of 68, the pair looks poised to fall back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, but the euro-dollar may threaten the bullish trend carried over from the previous year should we see a move back towards the 1.3000 figure.

British Pound: Core Inflation Slows, U.K. Credit Rating ‘Under Threat’

Although the headline reading for U.K. inflation held steady at an annualized 2.7% in December, core consumer prices grew 2.4% during the same period amid forecast for a 2.6%. Beyond the CPI report, warning shots from Fitch Ratings exacerbated the drop in the British Pound as the agency sees the region’s credit-rating ‘under threat.’

Despite the negative headlines surrounding the region, the Bank of England (BoE) Minutes due out on January 23 may prop up the sterling as the central bank adopts a hawkish tone for monetary policy, and we may see a growing number of central bank officials start to discuss a tentative exit strategy as the Monetary Policy Committee sees above-target inflation over the policy horizon.

Beyond the three-day decline, we’re seeing the GBPUSD preserve the upward trend carried over from 2012, and we will stay bullish on the pair as long as it continues to hold above the 1.6000 figure.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:30

8:30

Empire Manufacturing (JAN)

0.00

-8.10

USD

13:30

8:30

Advance Retail Sales (DEC)

0.2%

0.3%

USD

13:30

8:30

Advance Retail Sales ex Autos (DEC)

0.2%

0.0%

USD

13:30

8:30

Advance Retail Sales ex Auto & Gas (DEC)

0.5%

0.7%

USD

13:30

8:30

Retail Sales "Control Group" (DEC)

0.4%

0.5%

USD

13:30

8:30

Producer Price Index (MoM) (DEC)

-0.1%

-0.8%

USD

13:30

8:30

Producer Price Index (YoY) (DEC)

1.6%

1.5%

USD

13:30

8:30

Producer Price Index Ex Food & Energy (MoM) (DEC)

0.2%

0.1%

USD

13:30

8:30

Producer Price Index Ex Food & Energy (YoY) (DEC)

2.1%

2.2%

USD

13:50

8:50

Fed's Narayana Kocherlakota Speaks on Monetary Policy

EUR

14:00

9:00

IMF Tentative Date for Greece Review

CAD

14:00

9:00

Existing Home Sales (MoM) (DEC)

-1.7%

USD

15:00

10:00

Business Inventories (NOV)

0.3%

0.4%

USD

17:30

12:30

Fed's Charles Plosser 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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