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Euro Reverses Course on Dovish ECB- Pound Rally Underway

Euro Reverses Course on Dovish ECB- Pound Rally Underway

David Song, Strategist

Talking Points

  • Euro: ECB Keeps Rates on Hold, Strikes Dovish Tone for Policy
  • British Pound: BoE Retains Hawkish Tone, Carney Supports Current Framework
  • U.S. Dollar: Near-Term Correction in Play, Consumer Credit on Tap

Euro: ECB Keeps Rates on Hold, Strikes Dovish Tone for Policy

The Euro slipped to 1.3451 as European Central Bank (ECB) President Mario Draghi struck a cautious tone for the region, and the short-term pullback in the EURUSD should turn into a larger reversal as the Governing Council shows a greater willingness to ease monetary policy further.

Although the central bank head noted inflation expectations remain firmly anchored, it seems as though the central bank is keeping the door open to ease policy further as the economic downturn continues to threaten the outlook for price stability. Indeed, Mr. Draghi continued to highlight a weakened outlook for growth as the balance sheet adjustments drag on the real economy, and warned inflation will fall below the 2% in the coming months as the region struggles to return to growth.

When asked about the recent appreciation in the single currency, Mr. Draghi pledged to monitor the exchange for inflation risks as the strength in the euro dampens imported inflation, and we should see the Governing Council sound more dovish going forward as the governments operating under the monetary union maintain a reactionary approach in addressing the risks surrounding the region.

As the EURUSD struggles to hold above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we should see a move back towards the 38.2% Fib around 1.3120, and we may see the pair fail to maintain the upward trend carried over from the previous year as the central bank remains poised to carry out its easing cycle throughout 2013.

British Pound: BoE Retains Hawkish Tone, Carney Supports Current Framework

The British Pound rallied to a high of 1.5766 as the Bank of England (BoE) talked down bets for more quantitative easing, while future central bank Governor Mark Carney saw limited scope to introduce a nominal growth target for monetary policy as the Monetary Policy Committee continues to operate under its inflation-targeting framework.

After maintaining its current policy, the BoE preserved its more hawkish tone for monetary policy as the committee anticipates above-target inflation over the policy horizon and expects to see stronger price growth over the near-term as the central bank expects a slow and sustained recovery in the U.K. Meanwhile, Mr. Carney said the BoE must exit its unconventional policies while testifying in front Treasury Select Committee, and went onto say that the bar for changing the current framework remains high as the headline reading for inflation holds above the 2% target since 2009.

As the GBPUSD bounces off of the trendline dating back to the 2009 low (1.3500), we should see the rebound from the monthly low (1.5629) gather pace in the coming days, and we will maintain a bullish outlook for the sterling as the BoE slowly moves away from its easing cycle.

U.S. Dollar: Near-Term Correction in Play, Consumer Credit on Tap

The greenback is coming under pressure on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,245, and the reserve currency may continue to consolidate over the remainder of the week as the near-term rally remains overbought.

However, as the economic docket is expected to show consumer credit increasing another $14.5B in December, the ongoing expansion in private sector credit should encourage an improved outlook for growth, and we should see a growing number of Fed officials drop their dovish tone for monetary policy as the world’s largest economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:30

9:30

Fed's Jeremy Stein Speaks on Financial Stability

GBP

15:00

10:00

NIESR Gross Domestic Product Estimate (JAN)

-0.3%

USD

20:00

15:00

Consumer Credit (DEC)

$14.500B

$16.045B

--- 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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