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Euro Falters as 1Q GDP Disappoints, Pound Rebounds on BoE

Euro Falters as 1Q GDP Disappoints, Pound Rebounds on BoE

David Song, Strategist

Talking Points

  • Euro: EZ 1Q GDP Disappoints, H&S Continues to Pan Out
  • British Pound: BoE Raises Growth Outlook- Supports Inflation-Targeting Framework
  • U.S. Dollar: Producer Prices, Industrial Production on Tap

Euro: EZ 1Q GDP Disappoints, H&S Continues to Pan Out

The Euro slid to a fresh monthly low of 1.2874 as the region’s 1Q GDP report showed the growth rate contracting 0.3% versus forecasts for a 0.1% decline, and the prolonged recession may continue to drag on the exchange rate as it fuels speculation for additional monetary support.

As the euro-area struggles to return to growth, the European Central Bank (ECB) may come under increased pressure to further embark on its easing cycle, and we may see a growing argument to purchase Asset-Backed Securities (ABS) in an effort to encourage a stronger recovery. At the same time, negative interest rates may also turn into a real option for the Governing Council amid the ongoing turmoil in the periphery countries, and the central bank may continue to push into uncharted territory as the governments operating under the single currency become increasingly reliant on monetary support.

As the head-and-shoulders in the EURUSD continues to play out, the pair looks poised to give back the rebound from back in April (1.2743), and we may see a move back towards the 23.65 Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: BoE Raises Growth Outlook- Supports Inflation-Targeting Framework

The British Pound rallied to 1.5271 as the Bank of England (BoE) raised its growth forecast for the U.K., and the short-term rebound in the sterling may gather pace in the days ahead as market participants scale back bets for more quantitative easing.

Indeed, Governor Mervyn King struck up support for the inflation-targeting framework as the BoE sees a modest and sustainable recovery in Britain, but it seems as though there’s growing concerns surrounding the central bank’s credibility as price growth is expected to hold above the 2% over the policy horizon. In turn, we should see the Monetary Policy Committee slowly move away from its easing cycle, and the central bank may lay out a tentative exit strategy in the coming months as the region turns to growth.

As the GBPUSD continues to carve a higher base around the 1.5200 region, we may see another run at the 38.2% Fib from the 2009 low to high around 1.5680, and the sterling may continue to retrace the decline from earlier this year as the BoE adopts a more neutral to hawkish tone for monetary policy.

U.S. Dollar: Producer Prices, Industrial Production on Tap

The greenback extended the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)rallying to a fresh yearly high of 10,763, but the reserve currency may consolidate going into the North American trade as the economic docket is expected to dampen the outlook for growth and inflation.

A slowdown in U.S. Producer Prices along with a drop in Industrial Production may drag on the exchange rate as it raises expectations for more Fed support, but the reserve currency may stay afloat throughout the day should the flight to safety gather pace. In turn, we anticipate to see further USD strength over the near to medium-term, but the dollar remains poised for a correction as the recent rally becomes overbought.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

11:00

7:00

MBA Mortgage Applications (MAY 10)

7.0%

CAD

12:30

8:30

Manufacturing Shipments (MoM) (MAR)

0.5%

2.6%

USD

12:30

8:30

Empire Manufacturing (MAY)

4.00

3.05

USD

12:30

8:30

Producer Price Index (MoM) (APR)

-0.6%

-0.6%

USD

12:30

8:30

Producer Price Index (YoY) (APR)

0.8%

1.1%

USD

12:30

8:30

Producer Price Index Ex Food & Energy (MoM) (APR)

0.1%

0.2%

USD

12:30

8:30

Producer Price Index Ex Food & Energy (YoY) (APR)

1.7%

1.7%

CAD

13:00

9:00

Existing Home Sales (MoM) (APR)

2.4%

USD

13:00

9:00

Net Long-term TIC Flows (MAR)

-$17.8B

USD

13:00

9:00

Total Net TIC Flows (MAR)

$53.6B

USD

13:15

9:15

Industrial Production (APR)

-0.1%

0.4%

USD

13:15

9:15

Capacity Utilization (APR)

78.3%

78.5%

USD

13:15

9:15

Manufacturing Production (SIC) (APR)

0.0%

-0.1%

USD

14:00

10:00

NAHB Housing Market Index (MAY)

43

42

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAY 10)

230K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAY 10)

1812K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAY 10)

-910K

NZD

22:30

18:30

Business NZ Performance of Manufacturing Index (APR)

53.4

--- 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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