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Euro Struggles as EU Looks to Scale Back on Austerity

Euro Struggles as EU Looks to Scale Back on Austerity

David Song, Strategist

Talking Points

  • Euro: EU to Scale Back on Austerity amid Deepening Recession
  • British Pound: BoE Says ‘No Plan’ for Negative Interest Rates
  • U.S. Dollar: ISM Non-Manufacturing to Slow- Fed’s Lacker in Focus

Euro: EU to Scale Back on Austerity amid Deepening Recession

The EURUSD fell back from an overnight high of 1.3074 as the EU floated the idea of a possible ‘adjustment of the maturities on the EFSF and EFSM loans to Ireland and Portugal in order to smooth the debt redemption profiles of both countries,’ and the group may continue to scale back its push for austerity as the euro-area faces a deepening recession.

Although retail spending in the euro-area increased 1.2% in January, the Purchasing Manager Index for service-based activity slipped to 47.9 in February from 48.6 the month prior despite the upward revision from the initial forecast.

As the governments operating under the monetary union face record-high unemployment, we’re seeing a growing number of European policy makers curb their willingness to further address the debt crisis, and the periphery countries are likely to become increasingly reliant on monetary support as they struggle to get their house in order.

In turn, the European Central Bank may strike a more dovish tone for monetary policy at the meeting scheduled for later this week, and we may see President Mario Draghi promote a rate cut for the euro-area as the economic downturn threatens price stability.

As the EURUSD fails to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, the pair may continue to consolidate ahead of the ECB interest rate decision, but the rebound in the relative strength index may foreshadow a larger correction in the exchange rate as it slowly comes off of oversold territory.

British Pound: BoE Says ‘No Plan’ for Negative Interest Rates

The British Pound climbed to an overnight high of 1.5198 as service-based activity in the U.K. expanded at a faster pace during February, and the sterling may continue to recoup the losses from the previous month as the economic recovery slowly gathers momentum.

As the Bank of England interest rate decision comes into focus, board member Spencer Dale, who was reappointed as the Chief Economist for another three-years, said that ‘there is no plan’ to implement negative interest rates in the U.K., and we may see the majority of the Monetary Policy Committee preserve a neutral policy stance as the central bank sees a slow and sustainable recovery ahead.

As the relative strength index on the GBPUSD finally climbs back above 30, the rebound from oversold territory should produce a more meaningful correction in the exchange rate, but we may see the sterling continue to trade below the 50.0% Fib from the 2009 low to high around 1.5260 should a growing number of BoE officials push for more quantitative easing.

U.S. Dollar: ISM Non-Manufacturing to Slow- Fed’s Lacker in Focus

The greenback continued lose ground on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a fresh weekly low of 10,434, and the reserve currency may come under increased pressure during the North American trade as the economic docket is expected to show a slowing recovery.

Indeed, the ISM Non-Manufacturing index is expected to cross the wires at 55.0 following the 55.2 print in January, while the IBD/TIPP gauge for economic optimism is anticipated to narrow to 47.2 from 47.3 in February.

However, comments from Richmond Fed President Jeffrey Lacker, the lone dissenter on the 2012 FOMC, may prop up the greenback as we’re seeing a growing number of central bank officials adopt a more hawkish tone for monetary policy, and the bullish sentiment surrounding the greenback may gather pace over the near to medium-term as the FOMC appears to be slowly moving away from its easing cycle.

FX Upcoming










ISM Non-Manufacutring Composite (FEB)






IBD/TIPP Economic Optimism (MAR)






Fed's Jeffrey Lacker Speaks on Monetary Policy

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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