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Forex: Euro Hopes to Fizzle- Bearish RSI Divergence in Focus

Forex: Euro Hopes to Fizzle- Bearish RSI Divergence in Focus

David Song, Strategist

Talking Points

  • Euro: Growth to Return in 2013, France to Undertake More Reforms
  • British Pound: Remains Bullish Above 1.6000, RSI Maintains Support
  • U.S. Dollar: Housing Starts Jump, Jobless Claims Lowest Since 2008

Euro: Growth to Return in 2013, France to Undertake More Reforms

The Euro rallied to 1.3376 as the European Central Bank (ECB) and European Union President Herman Van Rompuy stirred hopes of seeing the euro-area return to growth in 2013, but optimism surrounding the single currency may fail to materialize as the debt crisis continues to drag on the real economy.

Indeed, German Economy Minister Philipp Roesler pledged to save the single currency while speaking in front on parliament, while European Union President Herman Van Rompuy struck a rather cautious tone and said France ‘needs to undertake wide-ranging structural reforms to ensure a sustainable return to growth’ as the government struggles to get it public finances in order.

As the ongoing push for austerity drags on economic activity, the euro-area remains at risk for a prolonged recession, and the region may fail to grow its way out of the slump without further monetary stimulus amid record-high unemployment along with the persistent slack in the real economy.

As the EURUSD struggles to put in a close above the 1.3400 figure, we’re keeping a close eye on the bearish divergence in the relative strength index, and we may see the pair carve out a near-term top in the days ahead as the oscillator continues to come off of overbought territory.

British Pound: Remains Bullish Above 1.6000, RSI Maintains Support

The British Pound advanced to 1.6038 amid a pickup in market sentiment, and the sterling appears to be carving a higher low this month as the GBPUSD persistently closes above the 1.6000 figure.

Although the economic docket is expected to show U.K. retail sales increasing another 0.1% in December, the Bank of England (BoE) Minutes due out on January 23 could be the game-changer for the British Pound, and we may see the upward trending channel in the GBPUSD continue to take shape should the central bank adopt a more hawkish tone for monetary policy.

As the BoE sees above-target price growth over the policy horizon, we should see the Monetary Policy Committee conclude its easing cycle in 2013, and the sterling looks poised for another run at the 1.6300 figure as the central bank looks to stem the threat for inflation.

In turn, we will stay bullish on the GBPUSD as long as it continues to close above 1.6000, and the pair looks poised for a rebound as the relative strength index continues to find interim support around the 41 region.

U.S. Dollar: Housing Starts Jump, Jobless Claims Lowest Since 2008

The greenback extended the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a high of 10,095, and the bullish sentiment surrounding the reserve currency may gather pace going forward as the fundamental outlook for the world’s largest economy improves.

Indeed, U.S. housing starts jumped 12.1% in December amid forecasts for a 3.3% print, while initial jobless claims slipped to 335K in the week ending January 12 to mark the lowest reading since the beginning of 2008. As economic activity gradually gathers pace, the more broad-based recovery should keep the FOMC on the sidelines in 2013, and we may see a growing number of central bank officials talk down expectations for more quantitative easing amid the resilience in private consumption along with the budding recovery in the housing market.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Philadelphia Fed. (JAN)

7.5

8.1

USD

17:05

12:05

Fed's Dennis Lockhart Speaks on U.S. Economy

NZD

21:45

16:45

Consumer Prices Index (QoQ) (4Q)

0.1%

0.3%

NZD

21:45

16:45

Consumer Prices Index (YoY) (4Q)

1.2%

0.8%

--- 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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