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Euro at Risk amid Fading Hopes Surrounding EU Meeting

Euro at Risk amid Fading Hopes Surrounding EU Meeting

2013-03-04 13:58:00
David Song, Strategist
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Talking Points

  • Euro: EU Finance Ministers Meet- ECB Meeting to Take Center Stage
  • British Pound: FLS Lending Falls, BoE at Risk of Greater Split
  • U.S. Dollar: Index Hits Fresh 2013 High, Less-Dovish Fed on Tap

Euro: EU Finance Ministers Meet- ECB Meeting to Take Center Stage

The EURUSD pared the overnight decline to 1.2981 amid speculation that the euro-area will utilize the European Stability Mechanism (ESM) to directly refinance its banking sector, but the finance minsters’ meeting in Brussels may fail to stem the risk for contagion should Cyprus struggle to secure a bailout.

As the governments operating under the monetary union become increasingly reliant on monetary support, there’s growing speculation that the European Central Bank (ECB) will show a greater willingness to push the benchmark interest rate to a fresh record-low, but the Governing Council may have little choice but to embark on its easing cycle throughout 2013 as the region faces a deepening recession.

According to a Bloomberg News survey, 56 of the 61 economists polled see the ECB keeping the benchmark interest rate at 0.75% at the rate decision scheduled for March 7, but dovish comments from central bank President Mario Draghi may trigger another selloff in the EURUSD as the region struggles to return to growth.

As the EURUSD trades within the previous day’s range, we may see the pair consolidate ahead of the ECB meeting, but the fundamental developments coming out of the euro-area may continue to drag on the exchange rate should it highlight a weakening outlook for growth and inflation. Indeed, we’re closely watching the relative strength index as it comes off of oversold territory, but we will look for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 over the near to medium-term amid the deviation in the policy outlook.

British Pound: FLS Lending Falls, BoE at Risk of Greater Split

The British Pound bounced back from 1.4998 despite the dismal data coming out of the U.K., and the short-term rebound may turn into a larger correction as the Bank of England (BoE) is widely expected to preserve its current policy in March.

Indeed, the BoE warned that it will ‘take time’ for the Funding for Lending Scheme to work its way through the real economy as borrowing from the non-standard program contracted GBP 2.4B, and the policy meeting on tap for later this week may reveal a growing rift within the Monetary Policy Committee as a growing number of central bank officials aim to encourage a stronger recovery.

As the U.K. continues to face a risk for a triple-dip recession, the MPC may see scope to expand its asset purchase program beyond the GBP 375B limit, and we may see the GBPUSD face another sharp selloff in the days ahead should the BoE sound more dovish this time around.

U.S. Dollar: Index Hits Fresh 2013 High, Less-Dovish Fed on Tap

The greenback continued to track higher on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) marking a fresh 2013 high of 10,516, but we may see the reserve currency consolidate throughout the North American trade as the economic docket remains fairly light for the remainder of the day.

Beyond the headlines coming out of the EU meeting, the Fed’s Beige Book on tap for later this week may highlight an improved outlook for growth and inflation, and the bullish sentiment surrounding the USD may gather pace ahead of the highly anditicpated Non-Farms Payroll report as the world’s largest economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:45

9:45

ISM New York (FEB)

56.7

USD

16:45

11:45

Former Fed Chairman Volcker Speaks on U.S. Economy

USD

18:15

13:15

Fed's Jerome Powell Speaks on 'Too Big To Fail'

AUD

22:30

17:30

AiG Performance of Service Index (FEB)

45.3

--- 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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