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Euro Fails to Breakout as ECB Fires Warning Shot- H&S Intact

Euro Fails to Breakout as ECB Fires Warning Shot- H&S Intact

David Song, Strategist

Talking Points

  • Euro: IFO Business Confidence Tops Forecast, ECB Warns of Market Uncertainty
  • British Pound: BoE Talks Down Bets for Rate Cut Amid ‘Modest’ Recovery
  • U.S. Dollar: Index Continues to Consolidate, Durable Goods Orders on Tap

Euro: IFO Business Confidence Tops Forecast, ECB Warns of Market Uncertainty

The Euro climbed to an overnight high of 1.2992 as Germany’s IFO Business Confidence survey advanced to 105.7 from 104.4 in April to mark the first rise in three-months, but we’re seeing the EURUSD struggle to breakout of the range from earlier this week as European policy makers maintain a cautious outlook for the region.

Although European Central Bank President (ECB) Mario Draghi argued that the non-standard measures have helped to increase stability across the monetary union, Governing Council member Jens Weidmann warned that delays to achieving the budget target ‘would risk an increase in market uncertainty,’ and went onto say that the high level of debt puts pressure on monetary policy as the governments operating under the fixed-exchange rate system become increasingly reliant on central bank support.

As European policy makers scale back their push for austerity, Mr. Weidmann added that the EU should allow for state bankruptcies, but we should see the ECB continue to embark on its easing cycle in the second-half of the year as the prolonged recession in the euro-area threatens the outlook for price stability.

In turn, we should see the head-and-shoulders pattern in the EURUSD continue to take shape ahead of the next ECB interest rate decision on June 6, and will look for a key break below the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 to see the Euro give back the rebound from back in July (1.2041).

British Pound: BoE Talks Down Bets for Rate Cut Amid ‘Modest’ Recovery

The British Pound continued to track higher on Friday, with the GBPUSD advancing to 1.5135, and the sterling may continue to retrace the decline from earlier this year as the Bank of England (BoE) appears to be slowly moving away from its easing cycle.

Although BoE board member Paul Fisher said the central bank should continue to shore up the U.K. economy, Mr. Fisher warned that the Monetary Policy Committee must keep a close eye on inflation expectations as price growth is expected to hold above the 2% target over the policy horizon, and went onto say that another rate cut would have a very limited impact in boosting demand amid the fiscal tightening.

As the BoE now sees a ‘modest’ recovery in the U.K., it appears as though the MPC will keep the Asset Purchase Facility capped at GBP 375B, and we may see a growing number of central bank officials start to discuss a tentative exit strategy in the second-half of the year as the region skirts a triple-dip recession.

As the GBPUSD continues to hold above the 1.5000 handle, the pair could be carving a higher low ahead of the next BoE policy meeting on June 6, and the sterling may track higher in the second-half of the year as the central bank scales back its willingness to expand the balance sheet further.

U.S. Dollar: Index Continues to Consolidate, Durable Goods Orders on Tap

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)giving back the overnight advance to 10,824, but we may see the reserve currency regain its footing during the North American trade as the economic docket is expected to highlight an improved outlook for growth.

Indeed, demands for U.S. Durable Goods are expected to increase 1.7% in April after contracting 5.7% the month prior, but we will also keep a close eye on orders for Non-Defense Capital Goods excluding Aircrafts as it acts as a gauge for future business investment.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

12:30

8:30

ECB's Vitor Constancio Speaks on Financial Regulation

USD

12:30

8:30

Durable Goods Orders (APR)

1.7%

-5.7%

USD

12:30

8:30

Durables ex Transportation (APR)

0.5%

-1.4%

USD

12:30

8:30

Non-Defense Capital Goods Orders ex Aircrafts (APR)

0.5%

0.2%

USD

12:30

8:30

Non-Defense Capital Goods Shipment ex Aircrafts (APR)

0.3%

EUR

15:45

11:45

EU's Olli Rehn Speaks on Financial Regualtion

--- 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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