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EUR Looks Lower on Deepening Recession- ECB Support on Horizon

EUR Looks Lower on Deepening Recession- ECB Support on Horizon

David Song, Strategist

Talking Points

  • Euro: EU to Consider More Extensions, ECB Sees ‘Major Concern’
  • British Pound: Public Borrowing Tops Forecast, BoE ‘Cautiously Optimistic’
  • U.S. Dollar: Richmond Fed, New Home Sales on Tap

Euro: EU to Consider More Extensions, ECB Sees ‘Major Concern’

The Euro tumbled to 1.2971 as manufacturing and service-based activity in Europe contracted for the fifteenth consecutive month in April, while the EU said it would ‘consider an extension of the deficit target deadline in the case of some member states’ as the governments operating under the single currency struggle to get their house in order.

As the euro-area remains mired in recession, European Central Bank (ECB) board member Christian Noyer warned that the lack of lending to small firms remain a ‘major concern’ for the region, 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 persistently threaten price stability.

However, as European officials become increasingly reliant on monetary support, the Governing Council may introduce more non-standard measures over the coming months, and the ECB may have little choice but to embark on its easing cycle throughout 2013 as the outlook for growth and inflation remains tilted to the downside.

As the EURUSD struggles to maintain the range-bound price action from earlier this week, we should see the pair continue to retrace the rebound from 1.2743, and we may see the euro-dollar make another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as European policy makers retain a reactionary approach in addressing the risks surrounding the region.

British Pound: Public Borrowing Tops Forecast, BoE ‘Cautiously Optimistic’

The British Pound continued to tag the 50-Day SMA (1.5199) as Public Sector Net Borrowing in the U.K. increased GBP 16.7B in March amid forecasts for a GBP 13.8B expansion, but we’re seeing the GBPUSD regain its footing ahead of the North American trade as a growing number of Bank of England (BoE) officials adopt a more neutral to hawkish tone for monetary policy.

BoE board member Ian McCafferty said he’s ‘cautiously optimistic’ as the Funding for Lending Scheme continues to work its way through the real economy, and went onto say that the above-target inflation is ‘more concerning’ for the central bank as the economic recovery slowly picks up.

As the GBPUSD comes off the moving average, the pair looks poised to push back above the 50.0% Fib from the 2009 low to high (1.5260) ahead of the advance 1Q GDP report, and we may see the upward trending channel carried over from March continue to take shape as the U.K. returns to growth.

U.S. Dollar: Richmond Fed, New Home Sales on Tap

The greenback pared the decline from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to a high of 10,576, and the reserve currency may continue to track higher during the North American trade as the economic docket is expected to highlight an improved outlook for growth.

Although the Richmond Fed survey is expected to show manufacturing activity expanding at a slower pace in April, the more broad-based recovery in the housing market may heighten the appeal of the USD, and we may see the bullish sentiment surrounding the greenback gather pace going forward as the world’s largest economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:00

9:00

House Price Index (MoM) (FEB)

0.7%

0.6%

USD

14:00

10:00

Richmond Fed Manufacturing Index (APR)

2

3

USD

14:00

10:00

New Home Sales (MAR)

419K

411K

USD

14:00

10:00

New Home Sales (MoM) (MAR)

1.9%

-4.6%

NZD

21:00

17:00

Reserve Bank of New Zealand Interest Rate Decision

2.50%

2.50%

--- 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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