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Euro Extends Losses on Deepening Recession- LTRO 2 in Focus

Euro Extends Losses on Deepening Recession- LTRO 2 in Focus

David Song, Strategist

Talking Points

  • Euro: Breaks Upward Trend as Manufacturing, Services Contract Further
  • British Pound: U.K. Public Borrowing Narrows More-Than-Expected

Euro: Breaks Upward Trend as Manufacturing, Services Contract Further

The Euro tumbled to a fresh monthly low of 1.3166 as manufacturing and serviced-based activity in Europe contracted at a faster pace during the month February, and the short-term pullback in the EURUSD may turn into larger reversal as the pair fails to maintain the upward trend carried over from the previous year.

As the fundamental developments coming out of the region points to a deepening recession, we are likely to see the governments operating under the single currency become increasingly reliant on monetary support, and the European Central Bank (ECB) may have little choice but to lower the benchmark interest rate further as the economic downturn threatens price stability.

Nevertheless, hopes surrounding the second LTRO repayment may prop up the EURUSD over the next 24-hours of trading as commercial banks in the euro-area look to reduce the reliance on ECB support, but the narrowing balance sheet may produce a prolonged recession in Europe as it dampens the outlook for private sector lending.

As the EURUSD breaks out of the ascending channel dating back to July, we should see the pair test the 38.2% Fibonacci from the 2009 high to the 2010 low around 1.3120 for interim support, but a break to the downside could spark a move back towards the 23.6% retracement around 1.2650 as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: U.K. Public Borrowing Narrows More-Than-Expected

The British Pound snapped back from a fresh yearly low of 1.5130 and the short-term rebound in the GBPUSD may gather pace in the coming days as data coming out of the U.K. instills an improved outlook for the region.

Indeed, U.K. Public Sector Net Borrowing contracted GBP 9.9B in January, which exceeded forecast for a GBP 9.5B decline, which was helped by the added income coming from the Bank of England’s (BoE) asset purchase program, and we may see the fundamental developments coming out of Britain continue to top market expectations as the central bank sees a slow and sustainable recovery ahead.

As the GBPUSD climbs back above the 50.0% Fib from the 2009 low to high around 1.5260, the short-term rebound may gather pace over the remainder of the week, but we will need to keep a close eye on the relative strength index as it continues to trade below the 30 figure.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:30

8:30

Consumer Price Index (MoM) (Jan)

0.1%

0.0%

USD

13:30

8:30

CPI Ex Food & Energy (MoM) (Jan)

0.2%

0.1%

USD

13:30

8:30

Consumer Price Index (YoY) (Jan)

1.6%

1.7%

USD

13:30

8:30

CPI Ex Food & Energy (YoY) (Jan)

1.8%

1.9%

USD

13:30

8:30

Initial Jobless Claims (16-Feb)

355K

341K

USD

13:30

8:30

Continuing Claims (9-Feb)

3150K

3114K

USD

15:00

10:00

Philadelphia Fed. (Feb)

1.0

-5.8

USD

15:00

10:00

Existing Home Sales (Jan)

4.90M

4.94M

USD

15:00

10:00

Existing Home Sales MoM (Jan)

-0.8%

-1.0%

USD

15:00

10:00

Leading Indicators (Jan)

0.2%

0.5%

USD

17:30

12:30

Fed's Bullard Speaks About Monetary Policy in New York

USD

18:00

13:00

Fed's Williams Speaks on Monetary Policy in New York

GBP

18:15

13:15

Bank of England's David Miles Speaks in Bath, England

--- 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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