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EUR Struggles on Rate Cut Bets- GBP Weighed by FLS Extension

EUR Struggles on Rate Cut Bets- GBP Weighed by FLS Extension

2013-04-17 13:00:00
David Song, Strategist

Talking Points

  • Euro: EU to Offer Exemptions for Uninsured Depositors at Failed Banks
  • British Pound: BoE Votes 6-3, Sees Scope to Extend FLS
  • U.S. Dollar: Fed’s Bullard, Rosengren on Tap, Beige Book in Focus

Euro: EU to Offer Exemptions for Uninsured Depositors at Failed Banks

The Euro slipped to a low of 1.3119 amid reports that the European Union will allow regulators to exempt a selected number of uninsured depositors at failing banks from taking involuntary write-downs, while former European Central Bank board member Lorenzo Bini Smaghi warned that the strength in the single currency ‘is a challenge for the ECB’ as it dampens the prospects for price stability.

As Cyprus works to secure the EUR 10B bailout, EU Economic and Monetary Affairs Commissioner Olli Rehn said the new approach will enable other troubled countries to avoid a default, but went onto say that Cyprus ‘should not be seen as a blueprint’ for the euro-area as European policy makers struggle to stem the risk for contagion.

At the same time, Governing Council member Peter Praet argued that monetary policy cannot serve as a substitute for reforms as the governments operating under the single currency become increasingly reliant on monetary support, and said that the weakening outlook for growth presents the biggest risk for the region as the International Monetary Fund warns of a deepening recession in Europe.

As the IMF encourages the ECB to push the benchmark interest rate to a fresh record-low, we may see the Governing Council further embark on its easing cycle over the coming months, and we may see the EURUSD struggle to maintain the rebound from earlier this month as the fundamental outlook for the region turns increasingly bleak. As the EURUSD struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, the pair could be carving out a lower top ahead of the next ECB meeting on May 2, and the single currency remains poised to face additional headwinds over the coming months as European officials maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: BoE Votes 6-3, Sees Scope to Extend FLS

The British Pound failed to maintain the range-bound price action even as the Bank of England (BoE) Minutes showed another 6-3 split within the Monetary Policy Committee, but the recent weakness in the sterling may be short-lived as the fundamental outlook for the U.K. picks up.

Beyond the vote count, the BoE saw scope to extend the Funding for Lending Scheme as the central bank sees a ‘muted’ recovery this year, and argued that taking steps now to rein in price growth would limit support to the economy despite an upward drift in medium-term inflation expectations.

Nevertheless, a separate report showed an unexpected 7.0K drop in U.K. jobless, with the claimant count rate crossing the wires at 4.6% versus forecast for a 4.7% print, and we may see the MPC slowly move away from its easing cycle as the U.K. faces a slow but sustainable recovery.

As the GBPUSD slips back below the 50.0% Fib from the 2009 low to high (1.5260), a close below the key figure may lead to a more meaningful correction in the exchange rate, and we may see the pair come under increased pressure over the next 24-hours of trading as retail spending in the U.K. is expected to contact 0.6% during the month of March.

U.S. Dollar: Fed’s Bullard, Rosengren on Tap, Beige Book in Focus

The greenback regained its footing on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)climbing to a high of 10,501, and the reserve currency may track higher throughout the North American trade should the Fed’s Beige Book highlight an improved outlook for the world’s largest economy.

Although we have St. Louis Fed President James Bullard and Boston Fed President Eric Rosengren scheduled to speak later today, the central bank survey may take center stage as market participants weigh the outlook for monetary policy. Indeed, the Beige Book may sound more upbeat this time around amid the resilience in private sector consumption along with the budding recovery in the housing market, but the protracted recovery in employment may continue to dampen the outlook for growth as discouraged workers leave the labor force.

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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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