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Euro Outlook Remains Weighed by Cyprus- Deeper Recession Ahead

Euro Outlook Remains Weighed by Cyprus- Deeper Recession Ahead

David Song, Strategist

Talking Points

  • Euro: Cyprus to Face Deeper Recession, Capital Control for Weeks
  • British Pound: U.K. Banks to Boost Capital, Retail Sales Slumps
  • U.S. Dollar: Durable Goods, New Home Sales, Consumer Confidence on Tap

Euro: Cyprus to Face Deeper Recession, Capital Control for Weeks

The Euro is struggling to hold above the 200-Day SMA (1.2874) even as European policy makers talk down the heightening risks surrounding Cyprus bailout, and the single currency may weaken further over the near to medium-term as the fundamental outlook for the region turns increasingly bleak.

Although Cypriot Finance Minister Michael Sarris talked down speculation for a euro-area exit, he warned of a deepening recession following the rescue, and said that the bail-in package sets a bad precedence for the monetary union as the capital controls on the periphery country are expected to last for weeks.

At the same time, Standard and Poor’s curbed its outlook for the euro-area as the group now sees the growth rate contracting 0.5% in 2013 versus an initial forecast for a 0.1% decline, and the deepening recession in the region may put increased pressure on the European Central Bank (ECB) to push the benchmark interest rate lower as the economic downturn threatens price stability.

Despite efforts to alleviate suspicions surrounding the Cyprus bailout, the EURUSD may continue to fall back towards the 1.2640-50 region – the 23.65 Fibonacci retracement from the 2009 high to the 2010 low – as the weakening outlook for growth and inflation foreshadows an ECB rate cut.

British Pound: U.K. Banks to Boost Capital, Retail Sales Slumps

The British Pound pared the advance to 1.5206 as the Bank of England (BoE) Deputy Governor Paul Tucker warned that U.K. institutions ‘need to repair themselves’ as the ‘economy requires sound banks ‘to recover.

As the Monetary Policy Committee maintains an accommodative policy stance, a central bank survey showed commercial banks are anticipating a ‘significant’ boost in capital during the second-quarter, but we way see the BoE continue to tolerate above-target inflation in an effort to stem the risk for a triple-dip recession.

As the Confederation of British Industry’s gauge for U.K. retail sales slips to the lowest level since August, the weakening outlook for growth may produce a more meaningful pullback in the GBPUSD, and the pair looks poised to face range-bounce prices over the near to medium-term as the exchange rate remains capped by a the 50.05 Fib from the 2009 low to high around 1.5260.

U.S. Dollar: Durable Goods, New Home Sales, Consumer Confidence on Tap

The greenback appears to be regaining its footing going into the North American trade as the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) stems the decline to 10,434, and the reserve currency may track higher throughout the day should the economic docket highlight an improved outlook for the U.S.

As the U.S. trade offers a good round of fundamental event risk, data pointing to a stronger recovery should heighten the appeal of the dollar, and the bullish sentiment surrounding the reserve currency may pick up as the developments coming out of the world’s largest economy dampens speculation of seeing additional Fed support.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

12:30

8:30

Durable Goods Orders (FEB)

3.8%

-5.2%

USD

12:30

8:30

Durables ex Transportation (FEB)

0.9%

1.9%

USD

12:30

8:30

Non-Defense Capital Goods Orders ex Aircrafts (FEB)

6.3%

USD

12:30

8:30

Non-Defense Capital Goods Shipmet ex Aircrafts (FEB)

-1.0%

USD

13:00

9:00

S&P/Case-Shiller Composite-20 s.a. (MoM) (JAN)

0.51%

0.88%

USD

13:00

9:00

S&P/Case-Shiller Composite-20 (YoY) (JAN)

7.90%

6.84%

USD

13:00

9:00

S&P/Case-Shiller Home Price Index (JAN)

145.95

USD

14:00

10:00

Consumer Confidence (MAR)

69.0

69.6

USD

14:00

10:00

Richmond Fed Manufacturing Index (MAR)

6

USD

14:00

10:00

New Home Sales (FEB)

425K

437K

USD

14:00

10:00

New Home Sales (MoM) (FEB)

-2.8%

15.6%

--- 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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