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Forex: Euro Rebound Weighed By Growth Concerns- Pound at Key Juncture

Forex: Euro Rebound Weighed By Growth Concerns- Pound at Key Juncture

David Song, Strategist

Talking Points

  • Euro: Germany Cuts Growth Forecast, ECB Talks Down Exchange Rate Risk
  • British Pound: BoE Warns of Additional Support For U.K. Banks
  • U.S. Dollar: Rebounds Ahead of Fed’s Beige Book

Euro: Germany Cuts Growth Forecast, ECB Talks Down Exchange Rate Risk

The EURUSD tagged an overnight high of 1.3323 as European Central Bank (ECB) board member Ewald Nowotny struck a neutral tone for monetary policy and argued that the euro exchange rate is ‘not a major concern,’ but we’re seeing the single currency struggle to hold its ground as the fundamental outlook for Europe’s largest economy deteriorates.

At the same time, Governing Council member Peter Praet said ‘maintaining price stability is the main task of the ECB’ as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support, and went onto say that the unprecedented efforts taking by the central bank ‘must be complemented by measures and reforms at the national level and of European governance’ as the debt crisis continues to drag on the real economy.

Indeed, Germany’s Economy Ministry now expects the economy to expand 0.4% in 2013 versus an initial projection for a 1.0% rise, and the ECB may continue to push back its forecast of seeing the euro-area return to growth amid record-high unemployment along with the ongoing slack in private sector activity.

Although we’re seeing the EURUSD maintain the upward trend from back in July, the bearish divergence in the relative strength index continues to dampen the prospects of seeing a further advance in the exchange rate, and the pullback from 1.3403 may expose the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the weakening outlook for growth and inflation raises the scope for an ECB rate cut.

British Pound: BoE Warns of Additional Support For U.K. Banks

The British Pound slipped to a fresh monthly low of 1.5975 as the Bank of England (BoE) warned two major banks in the U.K. may require billions in fresh capital, and we may see the sterling struggle to maintain the bullish trend carried over from the previous year should the GBPUSD close below the 1.6000 figure.

As the fundamental outlook remains clouded with high uncertainty, market participants continue to see scope for more quantitative easing in the U.K., but the central bank appears to be slowly moving away from its easing cycle as inflation is expected to hold above the 2% target over the policy horizon.

Beyond the vote count, the BoE Minutes due out on January 23 may show a more hawkish central bank amid the stickiness in price growth, and we may see the Monetary Policy Committee talk down speculation for more easing as the Funding for Lending Scheme continues to work its way through the real economy.

Indeed, we will scale back our bullish bias for the GBPUSD if the pair fails to put in a close above 1.6000, but the pound-dollar could still be carving out a higher low ahead of the policy statement should we see the pair trade back within the upward trending channel dating back to June.

U.S. Dollar: Rebounds Ahead of Fed’s Beige Book

The greenback is regaining its footing going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 10,046, and the reserve currency may track higher over the next 24-hours of trading should the Federal Reserve strike an improved outlook for the world’s largest economy.

The Beige Book may prop up the dollar as the central bank continues to highlight the resilience in private consumption along with the budding recovery in the housing market, and the fresh batch of central bank rhetoric may heighten the bullish sentiment surrounding the reserve currency as a growing number of Fed officials drop their dovish tone for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

9:00

Total Net TIC Flows (NOV)

-$56.7B

USD

14:00

9:00

Net Long-term TIC Flows (NOV)

$1.3B

USD

14:15

9:15

Industrial Production (DEC)

0.3%

1.1%

USD

14:15

9:15

Capacity Utilization (DEC)

78.5%

78.4%

USD

14:15

9:15

Manufacturing Production (SIC) (DEC)

0.6%

1.1%

USD

15:00

10:00

NAHB Housing Market Index (JAN)

48

47

USD

15:00

10:00

Fed's Narayana Kocherlakota Speaks on Monetary Policy

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (JAN 11)

1314K

USD

15:30

10:30

DOE U.S. Distillate Inventory (JAN 11)

6777K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (JAN 11)

7412K

EUR

17:00

12:00

ECB's Jorg Asmussen Speaks on Euro Economy

USD

19:00

14:00

Fed's Beige Book Economic Report

--- 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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