Talking Points

  • Euro: Spain to Limit Public Borrowing, Portugal Lowers Growth Outlook
  • British Pound: BoE Votes 6-3 on QE, Sees Sustainable Recovery Ahead
  • U.S. Dollar: Housing Starts Disappoints- FOMC Minutes in Focus

Euro: Spain to Limit Public Borrowing, Portugal Lowers Growth Outlook

The Euro failed to maintain the overnight advance to 1.3432 amid reports that the Spanish government will cap the interest its 17 regions can pay to borrow, while Portuguese Finance Minister Vitor Gaspar warned that the 2013 growth forecast may be reduced by 1.0% as the region seeks a one-year extension to meet its budget target.

Despite the ongoing turmoil in the euro-area, European Central Bank (ECB) board member Joerg Asmussen said there’s reason to be ‘cautiously optimistic’ as he expects stronger growth in the first-quarter, and sees a ‘mild’ and ‘gradual’ recovery this year as monetary policy remains highly accommodative. At the same time, Governing Council member Christian Noyer said that ‘there is no particular interest in cutting rates by a few cents if it only impacts Germany or core countries,’ but the central bank may have little choice but to carry out its easing cycle throughout 2013 as the fundamental outlook for the periphery countries turn increasingly bleak.

As the governments operating under the single currency become increasingly reliant on monetary support, we should see ECB President Mario Draghi continue to strike a dovish tone for monetary policy, and we may see the EURUSD threaten the bullish trend carried over from the previous year as the economic downturn threatens price stability.

As the 50-Day SMA (1.3304) lines up with trendline support, we will be keeping a close eye on the key figure over the remainder of the week, but a break below the moving average would foreshadow a larger decline in the exchange rate as the EURUSD struggles to push back above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500.

British Pound: BoE Votes 6-3 on QE, Sees Sustainable Recovery Ahead

The British Pound tumbled to a low of 1.5280 as the Bank of England (BoE) Minutes showed a 6-3 split with the Monetary Policy Committee, with Governor Mervyn King, Paul Fisher and David Miles pushing to expand its asset purchase target by another GBP 25B, and the central bank may stick to the sidelines throughout 2013 as inflation is expected to hold above the 2% target over the next two-years.

Although the BoE discussed further measures to boost private sector credit, the central bank anticipates a slow and sustainable recovery in the U.K., and we may see the MPC gradually move away from its easing cycle this year as the Funding for Lending Scheme continues to work its way through the real economy.

Despite the marked selloff in the GBPUSD, we may see the pair maintain the 2012 range as price action holds above the 50.0% Fib from the 2009 low to high around 1.5260, but we will keep a close eye on the RSI as it dips into oversold territory.

U.S. Dollar: Housing Starts Disappoints- FOMC Minutes in Focus

The greenback bounced back on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh yearly high of 10,357, and the reserve currency may appreciate further during the North American trade should the FOMC Minutes highlight an improved outlook for the world’s largest economy.

Although U.S. Housing Starts declined 8.5% in January, Building Permits increased another 1.8% during the same period, but the policy statement due out later today should have a greater influence on the USD as market participants weigh the outlook for monetary policy.

As a growing number of Fed officials take note of a more broad-based recovery, the minutes may sound more hawkish this time around, and the statement may continue to talk down bets for more quantitative easing as the U.S. economy gets on a more sustainable path.

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--- Written by David Song, Currency Analyst

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