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Euro to Consolidate Ahead of EU Summit- Pound Rebound in Sight

Euro to Consolidate Ahead of EU Summit- Pound Rebound in Sight

David Song, Strategist

Talking Points

  • Euro: Remains Capped by 38.2% Retracement- EU Summit in Focus
  • British Pound: Remains Oversold- RSI Carving Near-Term Base
  • U.S. Dollar: Maintains NFP Rally Amid Lack of Event Risk

Euro: Remains Capped by 38.2% Retracement- EU Summit in Focus

The Euro is struggling to maintain the overnight advance to 1.3023, and the single currency may come under increased pressure in the days ahead as European policy makers maintain a reactionary approach in tackling the debt crisis.

Although there’s growing hopes that the EU will draw up a rescue package for Cyprus later this week, the summit scheduled for March 14-15 may fail to generate an improved outlook for the region as the governments operating under the fixed-exchange rate system struggle to meet on common ground.

As the debt crisis raises the risk for a prolonged recession, the fundamental developments coming out of the region may continue to dampen the appeal of the single currency, and we may see a growing number of European Central Bank (ECB) show a greater willingness to push the benchmark interest rate to a fresh record-low as the economic downturn threatens price stability.

As the EURUSD struggles to trade back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, negative developments coming out of the euro-area should produce fresh monthly lows in the exchange rate, and the pair remains poised to give back the rebound from the November low (1.2659) as the fundamental outlook for the Europe turns increasingly bleak.

British Pound: Remains Oversold- RSI Carving Near-Term Base

The British Pound extended the decline from the previous week, with the GBPUSD slipping to a fresh monthly low of 1.4865, and we will keep a close eye on the relative strength index as it continues to highlight an oversold signal.

Indeed, we’re seeing the GBPUSD come up against the 61.8% Fib from the 2009 low to high around 1.4840-50, and the key figure may provide support as the Bank of England (BoE) refrains from expanding its asset purchase program beyond the GBP 375B target.

As the Monetary Policy Committee sticks to the sidelines, the BoE Minutes due out on March 20 may show another 6-3 split, and the majority may strike a more hawkish tone for monetary policy as the slow but sustainable recovery in the U.K. raises the outlook for inflation.

As the RSI on the GBPUSD appears to be carving out a bottom around the 22 figure, we are waiting for a close above 30 to see a more meaningful rebound in the exchange rate, and the pair may make a move back towards the 50.0% Fib around 1.5260 as market participants scale back bets for more quantitative easing.

U.S. Dollar: Maintains NFP Rally Amid Lack of Event Risk

The greenback appears to be firming up going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 10,552, but we may see the reserve currency consolidate during the remainder of the day as the economic docket remains fairly light for the next 24-hours of trading.

As the U.S. Non-Farm Payrolls report highlights an improved outlook for the world’s largest economy, the FOMC remains poised to adopt a more hawkish tone for monetary policy, and we may see a growing number of central bank officials look to conclude the easing cycle later this year as the region gets on a more sustainable path.

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--- 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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