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Euro Remains Poised for Further Losses on ECB Policy

Euro Remains Poised for Further Losses on ECB Policy

David Song, Strategist
Forex_Euro_Remains_Poised_for_Further_Losses_on_ECB_Policy_body_ScreenShot282.png, Euro Remains Poised for Further Losses on ECB Policy

Talking Points

  • Euro: ECB Continues to Discuss Negative Interest Rates
  • British Pound: U.K. Home Prices, Private Lending to Improve
  • U.S. Dollar: Consumer Confidence, Dallas Fed Manufacturing Survey on Tap

Euro: ECB Continues to Discuss Negative Interest Rates

The Euro regained its footing on Tuesday, with the EURUSD bouncing back from an overnight low of 1.2882, but the single currency may struggle to hold its ground ahead of the next European Central Bank (ECB) interest rate decision on June 6 as the Governing Council maintains a dovish tone for monetary policy.

Although ECB board member Christian Noyer argued that negative interest rates will have varying results across the smaller countries, the Bank of Portugal warned that lenders in the periphery country will continue to face ‘major’ challenges amid the persistent slack in the real economy, while German Finance Minister Wolfgang Schaeuble said the monetary union needs to address the rise in youth unemployment as the euro-area remains mired in recession.

As the governments operating under the single currency become increasingly reliant on monetary policy, we should see the Governing Council continue to embark on its easing cycle in the second-half of the year, and the central bank may show a greater willingness to buy up Asset-Backed Securities (ABS) while implementing a negative interest rate policy (NIRP) as Governing Council member Peter Praet says the central bank will do whatever is necessary to shore up the ailing economy.

As the ECB continues to push into uncharted territory, the policy outlook is likely to produce further declines in the EURUSD, and the head-and-shoulders formation may continue to take shape in the days ahead as it retains the range-bound price action carried over from the previous week. As the pair appears to be carving a lower top just below the 1.3000 handle, 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 bearish setup play out in the month ahead as the interest rate outlook deteriorates.

British Pound: U.K. Home Prices, Private Lending to Improve

The British Pound extended the rebound from the previous week, with the GBPUSD climbing to a high of 1.5133, 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.

As the economic docket for the U.K. is expected to show a further expansion in private sector credit along with higher home prices, a slew of positive developments should prop up the British Pound ahead of the BoE rate decision in June 6, and we may see the sterling outperform in the second-half of the year as the we see a growing number of central bank officials scale back their willingness to expand the balance sheet further.

In turn, the GBPUSD may continue to carve a higher low above the 1.5000 figure, and the pound-dollar may make another run at the 38.2% Fib from the 2009 low to high around 1.5680 amid the shift in the policy outlook.

U.S. Dollar: Consumer Confidence, Dallas Fed Manufacturing Survey on Tap

The greenback is struggling to maintain the advance from earlier this month, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)falling back from an overnight high of 10,836, but we may see the reserve currency regain its footing during the North American trade as the outlook for growth improves.

Beyond the S&P/Case-Shiller Home Price Index, a rise in the Conference Board’s Consumer Confidence survey paired with an uptick in the Dallas Fed Manufacturing index may prompt a bullish reaction in the USD, and the bullish sentiment surrounding the reserve currency should get carried into the second-half of the year as a growing number of Fed officials see the FOMC tapering the asset-purchase program in the coming months.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

13:00

9:00

S&P/Case-Shiller Composite-20 s.a. (MoM) (MAR)

1.00%

1.24%

USD

13:00

9:00

S&P/Case-Shiller Composite-20 (YoY) (MAR)

10.20%

9.32%

USD

13:00

9:00

S&P/Case-Shiller Home Price Index (MAR)

146.57

USD

13:00

9:00

S&P/Case-Shiller US Home Price Index (YoY) (1Q)

7.33%

USD

13:00

9:00

S&P/Case-Shiller US Home Price Index (1Q)

135.22

EUR

14:00

10:00

Bank of Portugal Financial Stability Report

USD

14:00

10:00

Richmond Fed Manufacturing Index (MAY)

-5

-6

USD

14:00

10:00

Consumer Confidence (MAY)

70.5

68.1

USD

14:30

10:30

Dallas Fed Manufacturing Activity (MAY)

-10.0

-15.6

--- 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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