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Euro to Weaken Further on Dovish ECB- More Austerity for Spain

Euro to Weaken Further on Dovish ECB- More Austerity for Spain

David Song, Strategist

Talking Points

  • Euro: Fitch Fires Warnings Shots on Spain, All Eyes on ECB Meeting
  • British Pound: U.K. Business Secretary Calls For More Easing Ahead of BoE
  • U.S. Dollar: Rally Overbought, Risk Trends in Focus Amid Light Calendar

Euro: Fitch Fires Warnings Shots on Spain, All Eyes on ECB Meeting

The Euro gave back the advance from the previous day and slipped to a low of 1.3505 as Fitch Ratings warned that the ongoing turmoil in Spain has the ‘potential to drag the euro zone down again.’ Indeed, the group said it would ‘take several more years of austerity’ for the Spanish government to get its house in order, and argued that ‘the crisis won’t be over until we see a sustained economic recovery, which is crucial in terms of helping to reduce government debt ratios.’

At the same time, there’s growing speculation that the governments operating under the fixed-exchange rate system will push for additional monetary support as the outlook for growth and inflation remains tiled to the downside, and we may see the European Central Bank (ECB) continue to embark on its easing cycle in 2013 as the economic downturn threatens price stability.

Although the ECB is widely expected to keep the benchmark interest rate at 0.75%, we may see President Mario Draghi strike a more dovish tone for monetary policy this time around, and the central bank head may talk up bets for a rate cut in an effort to steer the euro-area out of the recession.

As the EURUSD continues to pivot around the 50.0% Fibonacci retracement from the 2009 low to high around 1.3500, we may see the pair consolidate ahead of the ECB rate decision, but the single currency may continue to give back the advance from earlier this year should the central bank see scope to push the benchmark interest rate to a fresh record-low.

British Pound: U.K. Business Secretary Calls For More Easing Ahead of BoE

The British Pound tagged a low of 1.5630 on Wednesday as U.K. Business Secretary Vince Cable suggested that the Bank of England (BoE) may have to implement additional measures to lift the U.K. out of recession, but we may see the Monetary Policy Committee stick to the sidelines throughout the year as the central bank anticipates above-target inflation over the policy horizon.

In contrast, Prime Minister David Cameron struck a rather upbeat tone for the region and said that the economy is ‘moving in the right direction,’ and we may see the BoE strike a more neutral tone for monetary policy as the central bank expects a more robust recovery this year.

At the same time, there’s speculation that the central bank will adopt a nominal growth target for monetary policy as future BoE Governor Mark Carney is scheduled to testify in front the Treasury Select Committee ahead of the interest rate decision, but Mr. Carney may rely on the transmission mechanisms to prop up the U.K. economy as the Funding for Lending Scheme works its way through the real economy.

As the GBPUSD holds within the previous day’s range, we should see the pair hold steady going into the BoE meeting, but market participants may show a muted reaction to the rate decision should the BoE refrain from releasing a policy statement.

U.S. Dollar: Rally Overbought, Risk Trends in Focus Amid Light Calendar

The greenback continued to press higher on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a fresh monthly high 10,279, and we may see the reserve currency trade in-line with broader risk trends as the economic docket remains fairly light for the North American session.

Nevertheless, we should see the bullish sentiment surrounding the USD gather pace over the near to medium-term as a growing number of Fed officials see scope to halt the easing cycle later this year, but we are still looking for a pullback for an opportunity to buy into the dollar as the rally from earlier this year remains overbought.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

15:00

10:00

Ivey Purchasing Managers Index s.a. (JAN)

53.8

52.8

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (FEB 1)

5947K

USD

15:30

10:30

DOE U.S. Distillate Inventory (FEB 1)

-2315K

USD

15:30

10:30

DOE U.S. Gasoline Inventories (FEB 1)

-956K

NZD

21:45

16:45

Employment Change (QoQ) (4Q)

0.4%

-0.4%

NZD

21:45

16:45

Employment Change (YoY) (4Q)

0.2%

0.0%

NZD

21:45

16:45

Unemployment Rate (4Q)

7.1%

7.3%

NZD

21:45

16:45

Participation Rate (QoQ) (4Q)

68.4%

68.4%

AUD

22:30

17:30

AiG Performance of Construction Index (JAN)

38.8

--- 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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