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Bearish Euro Formation Continues to Take Shape Amid Dovish ECB

Bearish Euro Formation Continues to Take Shape Amid Dovish ECB

David Song, Strategist

Talking Points

  • Euro: ECB Looking at ABS Purchases, Negative Interest Rates
  • British Pound: Struggles to Hold Bullish Trend Ahead of BoE Inflation Report
  • U.S. Dollar: Retail Sales Tops Forecast, Business Inventories on Tap

Euro: ECB Looking at ABS Purchases, Negative Interest Rates

The Euro regained its footing on Monday, with the EURUSD climbing to a high of 1.2994, but the single currency remains poised to face additional headwinds over the near-term as the European Central Bank (ECB) continues to embark on its easing cycle.

Indeed, ECB President Mario Draghi continued to float the idea of purchasing asset-backed securities as the advance GDP report is expected to show the economy contracting another 0.1% in the first-quarter, while Governing Council member Ignazio Visco said negative interest rates in the euro-area may be ‘effective’ as the economic downturn threatens price stability.

At the same time, former ECB board member Lorenzo Bini Smaghi said Italy should tap the European Stability Mechanism (ESM) and ‘use the funds to recapitalize its banking system’ amid the ongoing turmoil in the periphery country, and we may see the governments operating under the monetary union become increasingly reliant on external support as they struggle to get their house in order.

However, there are reports that German Finance Minister Wolfgang Schaeuble spoke out against the ECB as the central bank looks to implement more non-standard measures, and the Governing Council may come under increased criticism as President Draghi continues to push monetary policy into uncharted territory. As European finance ministers get ready to convene in Brussels, positive headlines coming out of the meeting may help to prop up the Euro over the next 24-hours of trading, but we may see the EU make another attempt to buy more time as the group struggles to meet on common ground.

As the EURUSD carves a lower top in May, we may see the head-and-shoulders pattern continue to take shape in the days ahead, and we are looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental developments coming out of the euro-area continues to dampen the outlook for growth and inflation.

British Pound: Struggles to Hold Bullish Trend Ahead of BoE Inflation Report

The British Pound pared the sharp decline from the previous week, with the GBPUSD advancing to 1.5383, and the sterling may continue to track higher ahead of the Bank of England (BoE) inflation report as the central bank appears to be slowly moving away from its easing cycle.

Although the GBPUSD pierced through trendline support during the previous week, we’re seeing the pair hold above the 50.0% Fib from the 2009 low to high around 1.5260, and the sterling may continue to recoup the losses from earlier this year amid the shift in the policy outlook. Indeed, the BoE may raise its fundamental assessment for the U.K. as the economy skirts a triple-dip recession, and we may see the central bank talk down bets for more quantitative easing as it extends the Funding for Lending Scheme for another 12-months.

However, as the relative strength index on the GBPUSD fails to maintain the upward trend carried over from March, we may see the pair continue to consolidate ahead of the quarterly update, and the pound-dollar may fall back towards the 50.0% retracement around 1.5260 as it searches for support.

U.S. Dollar: Retail Sales Tops Forecast, Business Inventories on Tap

The greenback extended the advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tagging a high of 10,694, and the bullish sentiment surrounding the reserve currency may gather pace over the near-term as the economic docket reinforces an improved outlook for the world’s largest economy.

Retail spending in the U.S. unexpectedly advanced 0.1% in April amid forecasts for a 0.3% decline, and the resilience in private sector consumption may continue to increase the appeal of the reserve currency as it dampens the Fed’s scope to expand the balance sheet further. As Business Inventories are projected to climb another 0.3% in March, another positive print may push the dollar higher throughout the North America trade, but the greenback may face a short-term correction in the days ahead as the recent advance becomes overbought.

FX Upcoming










Euro-Zone Finance Ministers Meet in Brussels




Business Inventories (MAR)






Retail Sales ex Inflation (QoQ) (1Q)






RICS House Price Balance (APR)



--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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