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Euro Hit by S&P, ECB- British Pound Falters on Dovish BoE

Euro Hit by S&P, ECB- British Pound Falters on Dovish BoE

David Song, Strategist

Talking Points

  • Euro: S&P Cuts Slovenia’s Credit Rating, ECB Warns on Currency Strength
  • British Pound: Outlook Turns Bearish as BoE Strikes Dovish Tone

Euro: S&P Cuts Slovenia’s Credit Rating, ECB Warns on Currency Strength

The Euro climbed to a fresh weekly high of 1.3518 as industrial outputs in Europe increased 0.7% in December versus forecasts for a 0.2% print, while officials in Cyprus are talking down the risk for a bank-run even as the periphery country struggles to secure a bailout.

Nevertheless, Standard and Poor’s cut Slovenia’s credit rating to A- from A amid the regions ‘higher-than-anticipated debt burden,’ while there’s growing concern at the European Central Bank (ECB) that the persistent strength in the single currency will continue to hurt the periphery countries according to a report by Bild.

As the ECB continues to highlight the headwinds facing the economy, the Governing Council should continue to carry out its easing cycle in 2013, and we may see a growing number of central bank officials show a greater willingness to lower the benchmark interest rate further as the deepening recession in Europe threatens price stability.

As the 4Q GDP report is expected to show a deepening downturn in the euro-area, the EURUSD may come under pressure going into the end of the week, and we still anticipate a move back towards the 38.2$ Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as it struggles to hold above the 50.0% Fib (1.3500).

British Pound: Outlook Turns Bearish as BoE Strikes Dovish Tone

The British Pound tumbled to a fresh yearly low of 1.5532 as the Bank of England (BoE) struck a rather dovish tone for monetary policy, and we’re scaling back our bullish forecast for the sterling as the GBPUSD fails to preserve the upward trend carried over from the previous year.

Indeed, the BoE warned ‘attempting to bring inflation back to the target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the target in the medium term,’ and kept the door open to expand its balance sheet further as the U.K. faces a slow but sustainable recovery.

Although the BoE continues to see above-target inflation over the policy horizon, it seems as though the Monetary Policy Committee will maintain a neutral stance for monetary policy in an effort to encourage a stronger recovery, and we may see the sterling continue to give back the rebound from June amid heightening fears of a triple-dip recession in the U.K.

As the GBPUSD breaks the upward trend dating back to 2009, we may see the pair fall back towards the 50.0% Fib from the 2009 low to high around 1.5260, but the sterling may regain its footing over the next 24-hours of trading as we’re expecting to see a rebound in U.K. retail sales.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:30

8:30

Import Price Index (MoM) (JAN)

0.8%

-0.1%

USD

13:30

8:30

Import Price Index (YoY) (JAN)

-1.0%

-1.5%

USD

13:30

8:30

Advance Retail Sales (JAN)

0.1%

0.5%

USD

13:30

8:30

Retail Sales Less Autos (JAN)

0.1%

0.3%

USD

13:30

8:30

Retail Sales Ex Auto & Gas (JAN)

0.4%

0.6%

USD

13:30

8:30

Retail Sales "Control Group" (JAN)

0.3%

0.6%

USD

15:00

10:00

Business Inventories (DEC)

0.3%

0.3%

USD

15:30

10:30

DOE U.S. Crude Oil Inventories (Feb-8)

2623K

USD

15:30

10:30

DOE Cushing OK Crude Inventory (Feb-8)

-315K

USD

15:30

10:30

DOE Crude Oil Implied Demand (Feb-8)

14191

USD

16:10

11:10

Fed's Bullard to Speak on Economy at Arkansas State University

NZD

21:30

16:30

Business NZ PMI (JAN)

50.1

NZD

21:45

16:45

Food Prices (MoM) (JAN)

-0.2%

--- 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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