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Forex: Euro At Risk for Further Losses, Pound Searches for Support

Forex: Euro At Risk for Further Losses, Pound Searches for Support

David Song, Strategist

Talking Points

  • Euro: OMT Under Fire, ECB Has Limited View on LTRO Repayment
  • British Pound: U.K. Retail Sales Disappoints, BoE to Weigh New Policies
  • U.S. Dollar: Hits Fresh Weekly High, Fed’s Fisher Sees ‘Traction’

Euro: OMT Under Fire, ECB Has Limited View on LTRO Repayment

The EURUSD slipped to an overnight low of 1.3332 even as Portuguese Prime Minister Pedro Passos Coelho talked down speculation of a second rescue program, while former European Central Bank board member Athanasios Orphanides warned that the Outright Monetary Transactions program has ‘given governments yet another opportunity to postpone actions’ as European policy makers maintain a reactionary approach in addressing the debt crisis.

At the same time, Governing Council member Benoit Coeure said commercial banks in the euro-area need to improve the quality of assets on their balance sheet in light of the deepening recession, and went onto say that the central bank has no view on whether banks should repay the borrowed funds from the Longer-Term Refinancing Operations as the debt crisis continues to drag on the real economy.

As record-high unemployment paired with the slowdown in private consumption dampens the outlook for growth, we may see a growing number of ECB officials show a greater willingness to lower the benchmark interest rate further, and the central bank may continue to embark on its easing cycle throughout 2013 as the deepening recession threatens price stability.

As the EURUSD struggles to push back above the 1.3400 figure, the pair appears to be carving out a short-term top going into the end of the month, and we will look for a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the bearish divergence in the relative strength index continues to pan.

British Pound: U.K. Retail Sales Disappoints, BoE to Weigh New Policies

The British Pound tumbled to a fresh yearly low of 1.5909 as retail spending in the U.K. unexpectedly fell 0.3% in December, while Bank of England board member Ian McCafferty talked up speculation for additional monetary support amid the ongoing slack within the real economy.

Indeed, Mr. McCafferty argued that the Monetary Policy Committee may have to consider ‘other unorthodox means to conduct monetary policy’ in order to encourage a stronger recovery, and went onto say the central bank may ‘design new policies’ to balance the risks surrounding the region.

As the GBPUSD struggles to hold above the 1.6000 figure, with the relative strength index slipping below support (41), we may see the pair continue to retrace the rebound from 1.5822 amid growing fears of another economic downturn in the U.K. However, as the BoE is scheduled to release the meeting minutes next week, the fresh batch of central bank rhetoric may shake up the sterling, and we may see a more meaningful rebound in the exchange rate should the central bank adopt a more hawkish tone for monetary policy.

U.S. Dollar: Hits Fresh Weekly High, Fed’s Fisher Sees ‘Traction’

The greenback continued to gain ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a fresh weekly high of 10,134, and the bullish sentiment surrounding the reserve currency may gather pace over the near to medium-term as Fed officials scale back their willingness to expand the balance sheet further.

Dallas Fed President Richard Fisher struck an improved outlook for the U.S. and said that ‘there is some traction now in the economy,’ and continued to speak out against the open-ended asset purchase program as the pickup in economic activity raises the longer-term outlook for inflation. As we see the FOMC changing its tune, there’s growing speculation that the central bank will conclude its easing cycle in 2013, and the shift in the policy outlook should continue to increase the appeal of the USD as market participants scale back bets for more quantitative easing.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:55

9:55

U. of Michigan Confidence (JAN)

75.0

72.9

--- 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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