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Euro Losses to Accelerate, More Dovish ECB on Horizon

Euro Losses to Accelerate, More Dovish ECB on Horizon

David Song, Strategist

Talking Points

  • Euro: Price Growth Slows Further, More Dovish ECB on Tap
  • British Pound: U.K. Consumer Credit, Mortgage Approvals in Focus
  • U.S. Dollar: 4Q GDP Disappoints, More Fed Rhetoric Ahead

Euro: Price Growth Slows Further, More Dovish ECB on Tap

The EURUSD tagged an overnight low 1.3094 as the economic docket showed easing price pressures across the euro-area, and the pair may face additional headwinds in the month ahead as the weakening outlook for growth and inflation raises the European Central Bank’s (ECB) scope to push the benchmark interest rate to a fresh record-low.

Although unemployment in Germany contracted another 3K in February, price growth in Europe’s largest economy increased an annualized 1.5% during January to mark the slowest pace of growth since December 2010, while the core reading for euro-area inflation unexpectedly slowed to 1.3% after expanding 1.5% the month prior.

Beyond the headlines surrounding the Italian election, ECB President Mario Draghi struck a rather dovish tone for monetary policy as he expects inflation to ‘significantly’ undershoot the 2% target in 2014, and the central bank head may show a greater willingness to deliver another rate cut this year as the deepening recession threatens price stability.

With the ECB interest rate decision on tap for the following week, growing speculation for more monetary easing is likely to dampen the appeal of the single currency, and we may see the EURUSD continue to give back the rebound from November as it struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120. In the meantime, we will keep a close eye on the relative strength index as it continues to flirt with oversold territory, but we anticipate further declines in the exchange rate as the fundamental outlook for the euro-area deteriorates.

British Pound: U.K. Consumer Credit, Mortgage Approvals in Focus

The British Pound continued to retrace the sharp decline from earlier this month, with the GBPUSD advancing to a high of 1.5220, and the sterling may appreciate further ahead of the Bank of England (BoE) interest rate decision on March 7 as the central bank is widely expected to keep the benchmark interest rate at 0.50% while maintain its asset purchase program at GBP 375B.

Over the next 24-hours of trading, we’re expecting to see another 0.2B expansion in U.K. consumer credit, while Mortgage Approvals as projected to increase an annualized 56.5K in January, which would mark the fastest pace of growth January 2012.

As the Funding for Lending Scheme continues to work its way through the real economy, we should see the BoE stick to the sidelines throughout this year, and the Monetary Policy Committee may strike a more hawkish tone over the coming months as U.K. policy makers see a sustainable recovery ahead.

As the relative strength index on the GBPUSD comes off of oversold territory, the rebound from 1.5067 should gather pace going into the BoE meeting, but the pair may struggle to push back above the 50.0% Fib from the 2009 low to high around 1.5260 should the data coming out of the U.K. heighten the risk for a triple-dip recession.

U.S. Dollar: 4Q GDP Disappoints, More Fed Rhetoric Ahead

The greenback weakened further on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,391, and the reserve currency may face additional headwinds during the North American trade amid the slowing recovery in the world’s largest economy.

Indeed, the preliminary GDP report fell short of market expectations as the growing rate increased 0.1% versus forecasts for a 0.5% print, while personal consumption climbed 2.1% amid projections for a 2.3% rise. Nevertheless, initial and continuing claims continued to paint an improved outlook for the U.S. labor market as both figures crossed the wires lower-than-expected, but the fresh batch of central bank rhetoric from Fed Governor Sarah Bloom Raskin may prop up the dollar as a growing number of FOMC officials adopt a more hawkish tone for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:45

9:45

Chicago Purchasing Manager (FEB)

54.1

55.6

EUR

15:00

10:00

ECB's Peter Praet Speaks on Euro Economy

USD

16:00

11:00

Kansas City Fed Manufacturing Activity Index (FEB)

-2

USD

17:30

12:30

Fed's Sarah Bloom Raskin Speaks on Banking System

USD

21:00

16:00

US Treasury Reports Foreign Holdings of US Securities

NZD

21:45

16:45

Terms of Trade Index (QoQ) (4Q)

1.4%

-3.2%

AUD

22:30

17:30

AiG Performance of Manufacturing Index (FEB)

40.2

--- 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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