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Euro Risks Further Losses amid Renewed Threat for Contagion

Euro Risks Further Losses amid Renewed Threat for Contagion

2013-04-02 12:55:00
David Song, Strategist
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Talking Points

  • Euro: Unemployment Hits Record-High, Cyprus Seeks Extension
  • British Pound: Mortgage Lending Disappoints, Capped By Former Support
  • U.S. Dollar: Factory Orders on Tap, Fed Rhetoric in Focus

Euro: Unemployment Hits Record-High, Cyprus Seeks Extension

The Euro slipped to 1.2823 as unemployment in the monetary union climbed to a fresh record-high of 12.0% during the month of February, while Cyprus is looking for an extension in meeting its budget target as the periphery country struggles to navigate through the banking crisis.

As the governments operating under the single currency struggle to address the renewed threat for contagion, European Central Bank board member Marko Kranjec, who also heads the Slovenian central bank, pledged to ‘monitoring banks on a daily and a monthly basisamid the renewed threat for contagion, while the EU said the group is not in ‘negotiations with the Spanish government’ amid speculation that the region will need more time to achieve its fiscal targets.

Although the Governing Council is widely expected to keep the benchmark interest rate at 0.75%, the central bank may come under increased pressure to carry out its easing cycle throughout 2013 as the ongoing turmoil in the periphery countries raise the threat for a prolonged recession. In turn, ECB President Mario Draghi may sound more dovish this time around, and the central bank head may show a greater willingness to push borrowing costs to a fresh record-low as the economic downturn threatens price stability.

As the EURUSD struggles to push back above the 200-Day SMA at 1.2879, the downward trend carried over from February may continue to take shape, and the pair may continue to give back the rebound from back in November (1.2659) as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: Mortgage Lending Disappoints, Capped By Former Support

The British Pound is struggling to maintain the advance from the previous month, with the GBPUSD weakening to 1.5135, and we may see the pair continue to consolidate in the days ahead as market participants weigh the outlook for monetary policy.

Although U.K. Consumer Credit expanded another GBP 0.6B in February, Mortgage Approvals grew an annualized 51.7K amid forecasts for a 53.7K print, and there’s growing speculation that the Bank of England will expand its asset purchase program beyond the GBP 375B target in an effort to encourage a stronger recovery.

However, as above-target inflation erodes the outlook for private sector consumption, the majority of the Monetary Policy Committee may preserve the neutral policy stance throughout 2013, and the central bank may talk down bets for more quantitative easing as it sees a slow but sustainable recovery in the U.K.

As the GBPUSD makes another failed attempt to push back above former support – the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260 – we may see a move back towards the 61.8% retracement (1.4840-50), and the pair may face range-bound prices over the near to medium-term as the central bank sticks to the sidelines.

U.S. Dollar: Factory Orders on Tap, Fed Rhetoric in Focus

The greenback bounced back on Tuesday, Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) snapping back from a low of 10,391, and the reserve currency may track higher throughout the North American trade should the Fed strike an improved outlook for the world’s largest economy.

Although we’re expecting U.S. Factory Orders to increase 2.5% in February, we have a slew of central bank officials speaking throughout the day, and we may see a growing number of Fed officials turn increasingly upbeat towards the economy as the recovery gradually gathers pace. In turn, we may see the USDOLLAR continue to retrace the decline carried over from the previous month, and the greenback may track higher throughout 2013 as the FOMC appears to be slowly moving away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:45

9:45

ISM New York (MAR)

58.8

USD

14:00

10:00

Factory Orders (FEB)

2.5%

-2.0%

USD

14:00

10:00

IBD/TIPP Economic Optimism (APR)

42.2

EUR

15:20

11:20

ECB's Benoit Coeure Speaks on World Economy

EUR

16:00

12:00

Italian New Car Registrations (YoY) (MAR)

-17.41%

EUR

16:20

12:20

ECB's Coeure, Brazil's Pereira Speak on Currency Wars

USD

17:00

13:00

Fed's Narayana Kocherlakota Speaks on Monetary Policy

USD

17:30

13:30

Fed's Dennis Lockhart Speaks on U.S. Economy

USD

21:00

17:00

Total Vehicle Sales (MAR)

15.30M

15.33M

USD

21:00

17:00

Domestic Vehicle Sales (MAR)

12.04M

11.99M

GBP

23:01

19:01

BRC Shop Price Index (YoY) (MAR)

1.1%

USD

23:30

19:30

Fed's Charles Evans, Jeffrey Lacker Speak on Monetary Policy

--- 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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