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Euro Looks Lower Ahead of ECB Meeting on Deepening Recession

Euro Looks Lower Ahead of ECB Meeting on Deepening Recession

2013-03-01 13:45:00
David Song, Strategist
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Talking Points

  • Euro: Unemployment Hits Record-High, Inflation Slows Further
  • British Pound: U.K. Mortgage Approvals Disappoint, BoE on Horizon
  • U.S. Dollar: Personal Incomes Disappoint- ISM Manufacturing, Bernanke on Tap

Euro: Unemployment Hits Record-High, Inflation Slows Further

The EURUSD slipped to a fresh yearly low of 1.2984 as unemployment in the euro-area rose to a fresh record-high of 11.9%, while the headline reading for European inflation slowed to 1.8% in February to mark the lowest reading since September 2010.

As the deepening recession in the euro-area threatens price stability, we may see a growing number of European Central Bank (ECB) officials show a greater willingness to deliver another rate cut, and President Mario Draghi should sound more dovish this time around as the outlook for growth and inflation deteriorates.

Nevertheless, a report by the ECB said commercial banks will repay EUR 12.5B of three-year loans after the central bank pumped more than EUR 1T into the system, but the narrowing balance sheets amongst financial institutions may produce further headwinds for the ailing economy as it dampens the outlook for private sector credit.

As the governments operating under the single currency become increasingly reliant on monetary support, we should see the ECB carry out its easing cycle throughout 2013, and speculation for lower borrowing costs should put additional downside pressures on the EURUSD as European policy makers struggle to foster a sustainable recovery.

Indeed, we are still looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2650 as the long-term bearish flag formation on the EURUSD pans out, but we may see a small correction ahead of another major decline as the relative strength index comes up against oversold territory.

British Pound: U.K. Mortgage Approvals Disappoint, BoE on Horizon

The British Pound tumbled to a fresh 2013 low of 1.5011 as U.K. Mortgage Approvals increased 54.7K in January amid forecast for a 56.5K rise, but we may see the sterling regain its footing in the week ahead as the Bank of England (BoE) is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B.

The BoE interest rate decision scheduled for the following week may prop up the sterling as the majority of the Monetary Policy Committee maintains a wait-and-see approach, but we may see a growing rift within the central bank as the U.K. remains at risk for a triple-dip recession.

However, it seems as though the BoE will maintain its current policy over the near to medium-term as the Funding for Lending Scheme continues to work its way through the real economy, and the central bank may retain a hawkish tone in 2013 as inflation is expected to hold above the 2% target over the policy horizon.

Despite the oversold RSI signal on the GBPUSD, we need to see the oscillator push back above the 30 figure to see a more meaningful correction in the exchange rate, and the pair may consolidate ahead of the March 7 meeting as market participants weigh the outlook for monetary policy.

U.S. Dollar: Personal Incomes Disappoint- ISM Manufacturing, Bernanke on Tap

The greenback bounced back on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh yearly high of 10,483, but the reserve currency may consolidate throughout the North American trade as the fundamental developments coming out of the world’s largest economy disappoints.

Although we saw a 0.2% in personal spending, private incomes tumbled 3.6% in January amid forecasts for a 2.4% decline, and we may see the dollar struggle to hold its ground should the ISM Manufacturing report also highlight a weakening outlook for growth. At the same time, Fed Chairman Ben Bernanke is scheduled to speak later today, and the fresh batch of comments from the central bank head may heighten the bullish sentiment surrounding the dollar as the FOMC adopts a more hawkish tone for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:55

9:55

U. of Michigan Confidence (FEB F)

76.3

76.3

USD

15:00

10:00

Construction Spending (MoM) (JAN)

0.4%

0.9%

USD

15:00

10:00

ISM Manufacturing (FEB)

52.5

53.1

USD

15:00

10:00

ISM Prices Paid (FEB)

57.0

56.5

EUR

17:00

12:00

Italian New Car Registrations (YoY) (FEB)

-17.58%

USD

22:00

17:00

Total Vehicle Sales (FEB)

15.10M

15.23M

USD

22:00

17:00

Domestic Vehicle Sales (FEB)

11.90M

12.08M

USD

3:00

22:00

Fed Chairman Bernanke Speaks on Low Long-Term Interest Rates

--- 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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