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Euro Weighed by Risk Provisions- Sterling Hit by Growth Fears

Euro Weighed by Risk Provisions- Sterling Hit by Growth Fears

2013-03-12 12:55:00
David Song, Strategist
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Talking Points

  • Euro: Bundesbank Speaks Out on ECB Policy, Raises Risk Provision
  • British Pound: Business Output Contracts, Watching RSI
  • U.S. Dollar: Remains Overbought- Risk Sentiment to Drive Price

Euro: Bundesbank Speaks Out on ECB Policy, Raises Risk Provision

The Euro slipped to a low of 1.2989 as Bundesbank President Jens Weidmann spoke out against the unprecedented efforts taken by the European Central Bank and said that ‘they blur too much the responsibilities of monetary and fiscal policies.

Indeed, Mr. Weidmann warned of ‘an overall increase in counterparty credit risks stemming from refinancing loans and purchasing bonds’ as Germany’s central bank raised its risk provisions by EUR 6.7B to EUR 14.4B, and struck a rather dovish tone for monetary policy amid the ‘declining’ risk for inflation. As a result, the Governing Council member argued that the debt crisis cannot be solved by the ECB, and went onto say that he’s skeptical if the central bank ‘can or should tackle the different financing conditions for small and medium enterprises in different countries with monetary policy’ as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

However, as the debt crisis continues to undermine the fundamental outlook for the euro-area, the ECB may have little choice but to expand monetary policy further, and we may see a growing number of central bank officials show a greater willingness to push the benchmark interest rate to a fresh record-low as the deepening recession threatens price stability.

As ECB President Mario Draghi pledges to save the euro, little may be done at the EU Summit on tap for later this week, and we may see a renewed threat for contagion as Cyprus struggles to secure a bailout. In turn, the EURUSD may continue to consolidate within the narrow range carried over from the previous week, but we may see the pair ultimately give back the rebound from November (1.2659) as the pair struggles to climb back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120.

British Pound: Business Output Contracts, Watching RSI

The British Pound tumbled to a fresh yearly low of 1.4830 as an unexpected contraction in manufacturing and industrial outputs fueled fears of a triple-dip recession, while there’s reports that future Bank of England Governor Mark Carney met with Nicholas Macpherson, the U.K. Treasury’s top civil servant, to discuss a potential change to the central bank’s framework.

However, we’re seeing the sterling regain its footing going into the North American trade, with the GBPUSD trading back above the 61.8% Fib from the 2009 low to high around 1.4840-50, and the sterling may consolidate ahead of the BoE Minutes on tap for the following week as the policy statement is anticipated to show another 6-3 split with the Monetary Policy Committee.

As the relative strength index on the GBPUSD appears to be testing the 21 figure for support, the sterling could be carve out a short-term base around the key retracement, but we need to see the oscillator come off of oversold territory to see a more meaning correction in the exchange rate.

U.S. Dollar: Remains Overbought- Risk Sentiment to Drive Price

The greenback extended the decline from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to low of 10,532, and the short-term pullback in the reserve currency may turn into a larger correction as the RSI comes off of overbought territory.

As the economic docket remains fairly light for Tuesday, risk trends may dictate price action throughout the North American trade, but the bullish sentiment surrounding the greenback should gather pace over the near to medium-term as the Federal Reserve appears to be slowly moving away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

GBP

15:00

11:00

NIESR Gross Domestic Product Estimate (FEB)

0.0%

NZD

21:45

17:45

NZD Food Prices (MoM) (FEB)

1.9%

--- 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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