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Euro Gaps Lower on Cyprus Bank Levy- BoE Against Weak Pound

Euro Gaps Lower on Cyprus Bank Levy- BoE Against Weak Pound

David Song, Strategist

Talking Points

  • Euro: Cyprus Unveils Bank Deposit Levy- Portugal, Ireland Get Extension
  • British Pound: BoE’s McCafferty Warns Against Lower Exchange Rate
  • U.S. Dollar: Holds Narrow Range, To Consolidate Ahead of FOMC

Euro: Cyprus Unveils Bank Deposit Levy- Portugal, Ireland Get Extension

The Euro slipped to a fresh yearly low of 1.2880 as Cyprus announced plans to levy commercial bank deposits, which would raise EUR 5.8B of the EUR 10.0B bailout, and the renewed risk for contagion may continue to drag on the exchange rate as the EU maintains a reactionary approach in addressing the debt crisis.

However, it seems as though the new tax is struggling to gain support as Cyprus postpones the parliament vote for the second day, and we may see the EU make another attempt to buy more time as the governments operating under the monetary union struggle to get their house in order.

Indeed, Ireland and Portugal were given an extension to meet its budget target as the periphery countries face a deepening recession, but the more relaxed push for austerity may further dampen the appeal of the single currency as the debt crisis continues to drag on the real economy.

As the euro-area remains mired in a recession, we should see a growing number of European Central Bank (ECB) show a greater willingness to push the benchmark interest rate to a fresh record-low, but the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the economic downturn threatens price stability.

Although we’re looking for the EURUSD to fill-in the gap from the Sunday open, the pair remains poised to give back the rebound from back in November (1.2659) as headlines coming out of the euro-area dampens the fundamental outlook for the region.

British Pound: BoE’s McCafferty Warns Against Lower Exchange Rate

The British Pound pared the decline to 1.5070 as Bank of England (BoE) board member Ian McCafferty warned against the recent weakness in the sterling and said a further decline in the exchange would be worrisome ‘because the inflationary consequences of that would be damaging for the economy.’

As the BoE anticipates a slow but sustainable recovery in the U.K., Mr. McCafferty talked down the risk for stagflation, and expects economic activity to pick up ‘over the next year or so’ as the central bank maintains a highly accommodative policy stance.

In turn, the BoE Minutes on tap for later this week may show another 6-3 split within the Monetary Policy Committee, and it seems as though the central bank will stick to the sidelines in 2013 as inflation is expected to hold above the 2% target over the policy horizon.

As the GBPUSD continues to come off of the 61.8% Fibonacci retracement from the 2009 low to high around 1.4840-50, we are still looking for a move back towards the 50.0% Fib (1.5260), but the fresh batch of central bank rhetoric may spark a longer-term move towards the 1.6300 figure should we see a growing number of BoE officials adopt a more hawkish tone for monetary policy.

U.S. Dollar: Holds Narrow Range, To Consolidate Ahead of FOMC

The greenback continued to consolidate on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 10,499, and the reserve currency may consolidate further over the next 24-hours of trading as the economic docket remains fairly light ahead of the FOMC interest rate decision on March 20.

Although the FOMC is widely expected to maintain its current policy, the central bank may sound more upbeat this time around, and we may see a growing number of Fed officials scale back their willingness to expand the balance sheet further amid the more broad-based recovery in the U.S.

In turn, the bullish sentiment surrounding the reserve currency may gather pace in the days ahead, and we should see the central bank slowly move away from its easing cycle as the region gets on a more sustainable path.

FX Upcoming










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--- Written by David Song, Currency Analyst

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

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