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Euro Rebound at Risk amid Deepening Recession- All Eyes on ECB

Euro Rebound at Risk amid Deepening Recession- All Eyes on ECB

2013-03-28 12:20:00
David Song, Strategist

Talking Points

  • Euro: Cyprus Avoids Bank Run- OECD Called for More Monetary Easing
  • British Pound: Poised to Hold Range Ahead of BoE, Another 6-3 Split Ahead

Euro: Cyprus Avoids Bank Run- OECD Called for More Monetary Easing

The Euro pared the sharp decline from earlier this week as capital controls in Cyprus helped the periphery country to avert a bank run, but the weakening outlook for the region may continue to drag on the exchange rate as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

Indeed, a report by the European Central Bank (ECB) showed private sector lending contracted for the tenth consecutive month in February, while unemployment in Germany unexpectedly increase jumped 13K during the month of March amid forecast for a 2K decline.

As the region struggles to emerge from the recession, the Organization for Economic Cooperation and Development (OECD) argued that ‘there is a strong case to ease monetary policy further, given weak demand and inflation well below the ECB’s objective,’ and went onto say that the central bank should consider more quantitative easing while implementing ‘more specific forward guidance.’

With the ECB interest rate decision on tap for the following week, President Mario Draghi may sound more cautious this time around amid the renewed threat for contagion, 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 economic downturn threatens price stability.

As the downward trending channel in the EURUSD continues to take shape, the relief rally in the exchange rate is likely to be short-lived, and the pair looks poised to work its way back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it searches for support.

British Pound: Poised to Hold Range Ahead of BoE, Another 6-3 Split Ahead

The British Pound advanced to 1.5175 as service-based activity in the U.K. increased 0.3% in January following the 0.4% contraction the month prior, but the GBPUSD may continue to track sideways in the days ahead as market participants weigh the outlook for monetary policy.

Although the Bank of England (BoE) is scheduled to announce its next interest rate decision on April 4, we may see the Monetary Policy Committee refrain from releasing a policy statement as it sticks to the sidelines, and the meeting minutes due out on April 17 may show another 6-3 split within the central bank as the heightening risk for inflation limits the scope for more quantitative easing.

As the GBPUSD maintains the range from the 50.0% Fib (1.5260) to the 61.8% retracement (1.4850), the pair looks poised to trade sideways ahead of the interest rate decision, and the British Pound may continue to consolidate in the over the next 24-hours of trading as market participation thins ahead of the holiday weekend.

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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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