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Forex: Euro Struggles on Growing Threats, Durable Goods Top Forecast

Forex: Euro Struggles on Growing Threats, Durable Goods Top Forecast

David Song, Strategist

Talking Points

  • Euro: Private Lending Contracts- ECB Warns on Cyprus, Portugal
  • British Pound: BoE to Target Growth Amid Triple-Dip Recession
  • U.S. Dollar: Durable Goods Top Forecast, Pending Home Sales On Tap

Euro: Private Lending Contracts- ECB Warns on Cyprus, Portugal

The Euro pared the advance from the previous week as a report by the European Central Bank showed household lending contracted for the eighth consecutive month in December, and the single currency remains poised to face additional headwinds over the remainder of the month as the debt crisis continues to dampen the outlook for the region.

Indeed, ECB board member Joerg Asmussen warned that ‘disorderly developments in Cyprus,’ and the growing threat of a default is likely to produce further headwinds for the EURUSD as European policy makers maintain a reactionary approach in addressing the debt crisis. At the same time, Governing Council member Carlos Costa warned that the public reforms in Portugal are not sufficient to ensure sustainable finances, and we may see a growing number of central bank officials continue to push for more austerity as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

As the economic docket for later this week is expected to show unemployment in the euro-area climbing to a fresh record-high of 11.9% in December, the deepening recession in Europe should further dampen the appeal of the single currency, and euro-dollar looks poised for a near-term correction as the relative strength index maintains the downward trend carried over from the previous year. As the near-term rally in the EURUSD struggles to clear the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we are looking for a move back towards the 38.2% retracement (1.3120), and the pair may struggle to maintain the bullish trend dating back to July as the outlook for growth and inflation deteriorates.

British Pound: BoE to Target Growth Amid Triple-Dip Recession

The British Pound continued to lose ground as future Bank of England Governor Mark Carney showed a greater willingness to allow above-target inflation to ensure a stronger recovery in the U.K., while central bank board member David Miles floated the idea of a temporary growth target for the Monetary Policy Committee as the region faces a growing risk for a triple-dip recession.

As data coming out of the U.K. falls short of expectations, the weakening outlook for growth may produce further declines in the exchange rate, and it seems as though the BoE is scaling back its willingness to address the risk for inflation as the region struggles to emerge from the economic downturn.

Nevertheless, the recent decline in the GBPUSD could be coming to an end as the relative strength index comes up against oversold territory, and we may see the pound-dollar carve a bottom above the 38.2% Fib from the 2009 low to high around 1.5680 as the pair looks poised for a correction.

U.S. Dollar: Durable Goods Top Forecast, Pending Home Sales On Tap

The greenback extended the advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,198, and the reserve currency may appreciate further in the days ahead as the fundamental outlook for the world’s largest economy improves.

Indeed, demands for U.S. Durable Goods increased 4.6% in December amid forecasts for a 2.0% print, while the gauge for future business investments climbed 0.2% during the same period, which exceeded expectations for a 0.2% contraction.

As the economic recovery gradually gathers pace, we may see the 2013 FOMC scale back its willingness to expand the balance sheet further, and the central bank interest rate decision on tap for later this week may heightening the bullish sentiment surrounding the dollar should a growing number of Fed officials drop their dovish tone for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Pending Home Sales (MoM) (DEC)

0.3%

1.7%

USD

15:00

10:00

Pending Home Sales (YoY) (DEC)

12.5%

8.9%

USD

15:00

10:00

ISM Releases 2013 Seasonal Adjustments

USD

15:30

10:30

Dallas Fed Manf. Activity (JAN)

3

6.8

NZD

21:45

16:45

Trade Balance (NZ$) (DEC)

-105M

-700M

NZD

21:45

16:45

Exports (NZ$) (DEC)

3.98B

3.81B

NZD

21:45

16:45

Imports (NZ$) (DEC)

4.13B

4.51B

NZD

21:45

16:45

Trade Balance 12 Mth YTD (NZ$) (DEC)

-1870M

-1457M

--- 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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