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Euro Poised for More Losses on Dovish Draghi- Rate Cut Ahead

Euro Poised for More Losses on Dovish Draghi- Rate Cut Ahead

David Song, Strategist

Talking Points

  • Euro: ECB Meeting Takes Center Stage, Dovish Draghi on Tap
  • British Pound: Remains Oversold, BoE Says FLS Results ‘Disappointing’
  • U.S. Dollar: ADP Employment Tops Forecast, Fed’s Beige Book in Focus

Euro: ECB Meeting Takes Center Stage, Dovish Draghi on Tap

The EURUSD was little changed on Wednesday as the pair held within the previous day’s range, and the single currency should continue to consolidate over the next 24-hours of trading as the European Central Bank (ECB) interest rate decision takes center stage.

Although the ECB is widely expected to keep the benchmark interest rate at 0.75%, the press conference with President Mario Draghi may heighten the bearish sentiment surrounding the single currency should the central bank head talk up bets for another rate cut. As the deepening recession threatens price stability, Mr. Draghi may show a greater willingness to address the record-high unemployment along with the persistent slack in private sector activity, and we may see the Governing Council lay the ground works to deliver another rate cut as the fundamental outlook for the euro-area turns increasingly bleak.

As the ECB sees a ‘significant’ risk of undershooting the 2% target in the year ahead, the central bank may have little choice but to carry out its easing cycle throughout 2013, and the Governing Council may push back its forecast of seeing the region return to growth as the debt crisis continues to drag on the real economy.

In turn, we are likely to see the governments operating under the single currency become increasingly reliant on monetary support, and the EURUSD remains poised to give back the rebound from back in November amid the deviation in the policy outlook.

Although the relative strength index on the EURUSD continues to flirt with oversold territory, we are still looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the 38.2% Fib (1.3120) appears to be holding up as resistance.

British Pound: Remains Oversold, BoE Says FLS Results ‘Disappointing’

The British Pound pared the advance from earlier this week as Bank of England Governor Mervyn King said that the results of the Funding for Lending Schemeare disappointing,’ and we may see a growing number of central bank officials lean towards more quantitative easing in an effort to encourage a stronger recovery.

Although the FLS ‘has clearly worked in reducing funding costs for banks,’ Mr. King argued that the central bank would not be able to judge the success of the program until it compiles the rest of the data for 2013, but went onto say that ‘the scheme has achieved its basic objectives’ as it continues to work its way through the real economy.

As the relative strength index on the GBPUSD struggles to push back above the 30 figure, dovish comments coming out of the BoE interest rate decision may spark fresh yearly lows in the exchange rate, but we may see the Monetary Policy Committee refrain from releasing a statement as they maintain their current policy.

U.S. Dollar: ADP Employment Tops Forecast, Fed’s Beige Book in Focus

The greenback regained its footing on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 10,427, and the reserve currency may continue to track higher ahead of the highly anticipated Non-Farm Payrolls report as the fundamental outlook for the world’s largest economy improves.

Indeed, the ADP employment report showed another 198K rise in private payrolls amid forecast for a 170K print, and the Fed’s Beige Book on tap for later today may sound more upbeat this time around as the economic recovery gradually gathers pace.

In turn, we should see the bullish sentiment surrounding the greenback pick up over the near to medium-term, and the central bank may look to switch gears later this year as the region gets on a more sustainable path.

FX Upcoming










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DOE U.S. Distillate Inventory (MAR 1)





DOE U.S. Gasoline Inventories (MAR 1)





Federal Reserve Releases Beige Book

--- Written by David Song, Currency Analyst

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

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