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Euro Struggles as EU Meeting Disappoints- 1Q GDP in Focus

Euro Struggles as EU Meeting Disappoints- 1Q GDP in Focus

2013-05-14 12:45:00
David Song, Strategist

Talking Points

  • Euro: EU Meeting Disappoints- EZ 1Q GDP to Contract
  • British Pound: Searches for Support- To Consolidate Ahead of BoE
  • U.S. Dollar: Import Prices Slows Less-Than-Expected, Fed Report on Tap

Euro: EU Meeting Disappoints- EZ 1Q GDP to Contract

The Euro slipped to a low of 1.2945 as the European Union continued to clash over a bank resolution for the monetary union, and the single currency may continue to give back the rebound from the previous month as the fundamental outlook for the region remains clouded with high uncertainty.

As European policy makers struggle to meet on common ground, the EU remains poised to retain a reactionary approach in addressing the risks surrounding the region, and we may see the group make further attempts to buy more time as the governments operating under the fixed-exchange rate system scale back their push for austerity.

Indeed, the Euro may face additional headwinds over the next 24-hours of trading as the advance GDP report is expected to show the growth rate contracting another 0.1% in the first-quarter, and the prolonged recession may prompt the European Central Bank (ECB) to further embark on its easing cycle over the coming months as the economic downturn threatens price stability.

As growth and inflation deteriorates, we may see a growing number of ECB officials show a greater willingness to implement negative interest rates in the euro-area, but the Governing Council may also look to purchase Asset-Backed Securities (ABS) as the periphery countries become increasingly reliant on monetary support.

In turn, we should see the head-and-shoulders pattern in the EURUSD continue to pan out, and we will look for a further decline in the exchange rate as the pair carves a lower top in May. As the EURUSD continues to come off of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we should see the euro-dollar give back the rebound from the previous month, and the pair may work its way back towards the 23.6% retracement around 1.2640-50 to test for support.

British Pound: Searches for Support- To Consolidate Ahead of BoE

The British Pound extended the decline from earlier this week, with the GBPUSD tagging a low of 1.5257, but we may see the sterling consolidate ahead of the Bank of England (BoE) inflation report on tap for later this week as market participants weigh the outlook for monetary policy.

As the BoE preserves its current policy, the updated forecast may instill an improved outlook for the U.K., and we may see a growing number of central bank officials scale back their willingness to expand the balance sheet further as they see a slow but sustainable recovery in Britain.

Indeed, the BoE may sound more hawkish this time around as the U.K. skirts a triple dip recession, and we may see the GBPUSD track higher ahead of the quarterly report as the pair appears to be finding support around the 50.0% Fib from the 2009 low to high around 1.5260. In turn, we may the pound-dollar regain its footing over the next 24-hours of trading, and the pair may continue to retrace the decline from earlier this year should the central bank strike an improved outlook for the region.

U.S. Dollar: Import Prices Slows Less-Than-Expected, Fed Report on Tap

The greenback continued to appreciate on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)climbing to a fresh yearly high of 10,710, and we may see the reserve currency strengthen further during the North American trade as the economic docket dampens bets for more Fed support.

Import prices in the world’s largest economy contracted an annualized 2.6% amid forecast for a 3.1% drop, and the slowing decline in price growth may encourage the FOMC to adopt a more neutral to hawkish tone for monetary policy as the economic recovery gradually gathers pace. At the same time, New York Fed’s household debt report on tap for later today may further dampen bets for more quantitative easing should we see a marked expansion in consumer credit, and we may see the central bank slowly move away from its highly accommodative policy stance as the economy gets on a more sustainable path.

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--- Written by David Song, Currency Analyst

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