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Euro Continues to Carve Lower Top- ECB Increasingly Cautious

Euro Continues to Carve Lower Top- ECB Increasingly Cautious

David Song, Strategist

Talking Points

  • Euro: PMI Contracts at Slower Pace, More ECB Easing Ahead
  • British Pound: U.K. 1Q GDP Expands 0.3%, BoE to Target Inflation
  • U.S. Dollar: Jobless Claims Tops Forecast- House Prices, New Home Sales on Tap

Euro: PMI Contracts at Slower Pace, More ECB Easing Ahead

The Euro advanced to an overnight high of 1.2903 as the purchasing manager index showed manufacturing and service-based activity in Europe contracting at a slower pace in May, but the rebound in the single currency is likely to be short-lived as the region remains mired in recession.

European Central Bank board member Peter Praet said the board is looking ‘at all possibilities’ to shore up the ailing economy as the region struggles to return to growth, while Governing Council member Christian Noyer noted that the central bank is looking to introduce ‘monetary policy instruments that could further reduce fragmentation’ across the monetary union as the governments operating under the single currency struggle to get their house in order.

At the same time, ECB board member Ewald Nowotny warned that there’s little ‘indication that there will be a significant improvement in the economic situation in the short term,’ and warned that ‘we may see worse numbers in the course of the year’ as he sees the economy contracting in 2013.

As a growing number of Governing Council officials turn increasingly cautious on the economy, we should see the ECB push the benchmark interest rate to a fresh record-low in the second-half of the year, and it seems as though the central bank will also introduce more non-standard measures in the coming months in an effort to boost private sector lending.

As the EURUSD retains the range-bound price action from earlier this week, the pair should continue to carve a lower top going into the final days of May, and we should see the head-and-shoulders pattern continue to take shape in June as the ECB retains a dovish tone for monetary policy. In turn, we are still looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and we may see the EURUSD fail to maintain the rebound from July (1.2041) as European policy makers struggle to address the risks surrounding the region.

British Pound: U.K. 1Q GDP Expands 0.3%, BoE to Target Inflation

The British Pound pared the sharp decline from earlier this week, with the GBPUSD climbing to a high of 1.5093, and the sterling may continue track higher in the days ahead as the fundamental developments coming out of the U.K. dampens speculation for more quantitative easing.

Indeed, the preliminary GDP reading showed the U.K. economy expanding 0.3% in the first quarter, with private sector consumption advancing 0.1%, and it seems as though the Bank of England (BoE) is slowly moving away from its easing cycle as the region skirts a triple-dip recession.

Although the Monetary Policy Committee has ‘had a hard time rebalancing’ the economy, BoE board member Ben Broadbent said that the central bank is focus on achieving the 2% target for inflation, and we may see a growing number of BoE officials scale back their willingness to expand the balance sheet further as price growth is expected to accelerate throughout the course of the year.

As the GBPUSD continues to give back the rebound from back in March (1.4830), we may see the pair develop a broader downward trend in the days ahead, but an upward revision in the preliminary 1Q GDP report may prop up the sterling over the next 24-hours of trading as it dampens bets for more QE.As a result, we may see the GBPUSD carve out a higher low ahead of the next BoE interest rate decision on June 6, and the sterling may outperform against its major counterparts in the second-half of 2013 amid the shift in the policy outlook.

U.S. Dollar: Jobless Claims Tops Forecast- House Prices, New Home Sales on Tap

The greenback lost ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 10,784, but the reserve currency may track higher during the North American trade as the economic docket is expected to instill an improved outlook for the U.K.

Indeed, U.S. initial and continuing claims both beat market expectations amid the ongoing improvement in employment, and the budding recovery in the housing market may further increase the appeal of greenback as home prices are expected to increase another 0.8% in March, while New Home Sales are projected to rise 1.9% in April.

FX Upcoming










House Price Index (MoM) (MAR)






House Price Purchase Index (QoQ) (1Q)





New Home Sales (APR)






New Home Sales (MoM) (APR)






Euro-Zone Consumer Confidence (MAY A)






Kansas City Fed Manufacturing Activity Index (MAY)






ECB's Jens Weidmann Speaks on Euro Economy




ECB President Mario Draghi Speaks on Euro Economy

--- Written by David Song, Currency Analyst

To contact David, e-mail 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

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