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Euro Struggles Ahead of EU Summit amid Deepening Recession

Euro Struggles Ahead of EU Summit amid Deepening Recession

David Song, Strategist

Talking Points

  • Euro: Industrial Production Disappoints- EU Summit Takes Center Stage
  • British Pound: RSI Rebound Foreshadows Larger Correction

Euro: Industrial Production Disappoints- EU Summit Takes Center Stage

The Euro fell to 1.2994 as the larger-than-expected decline in industrial outputs fueled fears of a deepening recession in Europe, and the single currency may weaken further going into the EU Summit amid the renewed threat for contagion.

Indeed, we may see the meeting in Brussels disappoint should Cyprus fail to secure a bailout package, and the EU may make another attempt to buy more time as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

As a growing number of European countries scale back their push for austerity, European Central Bank board member Jens Weidmann argued that ‘central banks have already done enough to support the euro-area, and have extended the mandate into the fiscal policy area,’ and warned ‘politicians are expecting more and more from centralbanks’ as they struggle to get their house in order.

As headlines coming out of the euro-area fail to instill an improved outlook for the region, we may see the bearish sentiment surrounding the single currency gather pace over the remainder of the week, and the EURUSD may struggle to maintain the range-bound price action from earlier this month as there’s growing expectations of seeing the ECB take additional steps to support the monetary union.

As the EURUSD remains capped by the 38.2% Fibonacci retracement from the 2009 high to the 2001 low around 1.3120, we are still looking for a move back towards the 23.6% retracement (1.2640-50), and the single currency remains poised to face additional headwinds throughout 2013 as the outlook for growth and inflation deteriorates.

British Pound: RSI Rebound Foreshadows Larger Correction

The British Pound pared the decline from earlier this week, with the GBPUSD advancing to a high of 1.4980, and the short-term rebound may turn into a larger correction as the relative strength index comes off of oversold territory.

As the Bank of England Minutes on tap for next week is expected to show the majority maintaining a neutral policy stance for monetary policy, the bounce from 1.4830 should gather pace in the days ahead, but we may see the Monetary Policy Committee sound more hawkish this time around as a gauge for U.K. inflation climbs to a 4 ½ year high.

As the GBPUSD manages to close above the 61.8% Fib from the 2009 low to high (1.4840-50), we may see the pair carve out a near-term bottom over the remainder of the week, but would need to see the relative strength index push and close above the 30 figure to see a more meaningful rebound in the exchange rate.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

12:30

8:30

Import Price Index (MoM) (FEB)

0.50%

0.60%

USD

12:30

8:30

Import Price Index (YoY) (FEB)

-0.60%

-1.30%

USD

12:30

8:30

Advance Retail Sales (FEB)

0.50%

0.10%

USD

12:30

8:30

Retail Sales Less Autos (FEB)

0.50%

0.20%

USD

12:30

8:30

Retail Sales Ex Auto & Gas (FEB)

0.20%

0.20%

USD

12:30

8:30

Retail Sales "Control Group" (FEB)

0.20%

0.10%

USD

14:00

10:00

Business Inventories (JAN)

0.40%

0.10%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAR 8)

3833K

USD

14:30

10:30

DOE Cushing OK Crude Inventory (MAR 8)

257K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAR 8)

-616K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAR 8)

-3830K

USD

18:00

14:00

Monthly Budget Statement (FEB)

-205.00B

-231.68B

USD

20:00

16:00

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

--- 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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