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Euro Rally to Get Capped, Further ECB Support on Horizon

Euro Rally to Get Capped, Further ECB Support on Horizon

2013-04-09 12:55:00
David Song, Strategist
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Talking Points

  • Euro: Spain Calls for More ECB Action to Repair Transmission Mechanism
  • British Pound: U.K. Business Outputs Top Forecast, Eyes 38.2% Fib
  • U.S. Dollar: Wholesale Sales, Inventories on Tap

Euro: Spain Calls for More ECB Action to Repair Transmission Mechanism

The Euro pared the overnight advance to 1.3067 as Spanish Prime Minister Mariano Rajoy said the EU should consider revamping the European Central Bank’s (ECB) mandate, while Economy Minister Luis de Guindos argued that the Governing Council should introduce measures to address ‘fragmentation of the capital markets’ as the euro-area remains mired in recession.

Moreover, Mr. Guindos said the ECB should take further steps in repairing the transmission of monetary policy amid the ongoing turmoil in the periphery countries, while U.S. Treasury Secretary Jacob Lew encouraged the region to adopt policies that foster consumer demand as the outlook for growth and inflation remains weak.

As the governments operating under the single currency struggle to get their house in order, the ECB may persistently show a greater willingness to push the benchmark interest rate to a fresh record-low, and the Governing Council may carry out its easing cycle throughout 2013 as the prolonged recession continues to threaten price stability.

Nevertheless, the EURUSD may continue to work its way back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as it breaks out of the downward trending channel dating back to February, but the euro-dollar may continue to give back the rebound from back in November (1.2659) as the governments operating under the single currency look for more time in getting their house in order.

British Pound: U.K. Business Outputs Top Forecast, Eyes 38.2% Fib

The British Pound pared the decline from the previous day and advanced to a high of 1.5324 as the fundamental developments coming out of the U.K. encouraged an improved outlook for growth. Indeed, U.K. manufacturing increased 1.0% in February versus forecasts for 0.4% print, while industrial outputs climbed 0.8% after contracting a revised 1.9% during the prior month.

As the Bank of England (BoE) sees a slow but sustainable recovery in the U.K. the Monetary Policy Committee is likely to endorse a neutral policy stance over the remainder of the year, and we may see a growing number of central bank officials start to adopt a hawkish tone as inflation is expected to hold above the 2% target throughout the policy horizon.

As the GBPUSD continues to hold above the 50.0% Fib from the 2009 low to high around 1.5260, the pair looks poised to work its way back towards the 38.2% retracement (1.5680), and may stay afloat going into the BoE Minutes due out on April 17 as we anticipate another 6-3 split within the MPC.

U.S. Dollar: Wholesale Sales, Inventories on Tap

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) is struggling to hold its ground on Tuesday, with the gauge slipping to a low of 10,480, but we may see the greenback regain its footing later today as the economic docket is expected to instill an improved outlook for the world’s largest economy.

Indeed, wholesale sales are projected to increase 1.3% in February, while wholesale inventories are expected to expand another 0.5% during the same period amid the resilience in private sector consumption. In turn, we may see a growing number of Fed policy makers strike a more neutral to hawkish tone for monetary policy, and the central bank appears to be slowly moving away from its easing cycle as the outlook for growth and inflation picks up.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:30

9:30

Fed's Jeffrey Lacker Speaks on World Economy

USD

13:30

9:30

IMF Releases World Economic Outlook

GBP

14:00

10:00

NIESR Gross Domestic Product Estimate (MAR)

-0.1%

USD

14:00

10:00

Wholesale Inventories (FEB)

0.5%

1.2%

USD

14:00

10:00

Wholesale Sales (MoM) (FEB)

1.5%

-0.8%

EUR

14:15

10:15

EU's Van Rompuy Meets Slovenian Prime Minister

EUR

16:00

12:00

ECB's Jorg Asmussen Speaks on Euro Economy

USD

17:00

13:00

Fed's Dennis Lockhart Speaks on Financial Stability

NZD

22:45

18:45

Card Spending - Retail (MoM) (MAR)

0.3%

0.8%

NZD

22:45

18:45

Card Spending (MoM) (MAR)

0.8%

--- 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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