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Euro Remains Capped Ahead of ECB- H&S Formation to Take Shape

Euro Remains Capped Ahead of ECB- H&S Formation to Take Shape

David Song, Strategist
Forex_Euro_Remains_Capped_Ahead_of_ECB-_HS_Formation_to_Take_Shape_body_ScreenShot013.png, Euro Remains Capped Ahead of ECB- H&S Formation to Take Shape

Talking Points

  • Euro: 1Q GDP Contracts 0.2%, Retail Sales Slumps
  • British Pound: U.K. Service-Based Activity Gathers Pace
  • U.S. Dollar: ADP Disappoints- ISM, Fed’s Beige Book on Tap

Euro: 1Q GDP Contracts 0.2%, Retail Sales Slumps

The Euro tagged a low of 1.3051 ahead of the European Central Bank (ECB) policy meeting as the preliminary GDP report showed the growth rate contracting another 0.2% in the first-quarter, while retail spending slipped another 0.5% in April to mark the longest stretch of declines the last three-months since 2002.

As the region faces a prolonged recession, the ECB remains poised to lower its outlook for growth and inflation, and we may see a greater discuss to implement a negative interest rate policy (NIRP) across the euro-area as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support. Indeed, Portugal is seeking ‘eligibility for the OMT program’ as it looks to avoid another bailout, and we may see the ECB come under increased pressure to implement more non-standard measures as the periphery countries struggle to get their house in order.

Despite the mixed views surrounding Asset-Backed Security (ABS) purchases, ECB President Mario Draghi may look to expand the balance sheet further in an effort to encourage private sector lending, and the euro remains poised to face additional headwinds in the second-half of the year as the European policy makers retain a reactionary approach in addressing the risks surrounding the region.

As the EURUSD continues to carve a lower top below the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, a dovish ECB may serve as the fundamental catalyst to put the head-and-shoulders formation into motion, and we will continue to look for a move back towards the 23.6% retracement around 1.2640-50 as the dismal developments coming out of the euro-area dampen the appeal of the single currency.

British Pound: U.K. Service-Based Activity Gathers Pace

The British Pound extended the advance from earlier this week as serviced-based activity in the U.K. expanded at a faster pace in May, with the Purchasing Manager index advancing to 54.9 from 52.9 the month prior, and the sterling looks poised to track higher over the next 24-hours of trading as the Bank of England (BoE) is widely expected to maintain its current policy in June.

As the BoE anticipates a sustainable recovery in the U.K., we may see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy, and the Monetary Policy Committee may slowly move away from its easing cycle in the coming months as the region is expected to face above-target inflation over the policy horizon. Nevertheless, the BoE may refrain from releasing a policy statement once again as the central bank continues to stick to the sidelines, but another 6-3 should spark a bullish reaction in the British Pound as market participants scale back bets for more quantitative easing.

In turn, we may see the GBPUSD make another run at the 38.2% Fib from the 2009 low to high around 1.5680, and the sterling may outperform in the second-half of the year amid the shift in the policy outlook.

U.S. Dollar: ADP Disappoints- ISM, Fed’s Beige Book on Tap

The greenback is struggling to hold its ground ahead of the Fed’s Beige Book, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the advance to 10,729, but the weakness may be short-lived as the economic docket is expected to show an improved outlook for the world’s largest economy.

Indeed, the dollar took a hit as the ADP Employment report showed private payrolls increasing 135K in May amid forecasts for a 165K print, and the survey certainly does not bode well for Friday’s Non-Farm Payroll report, which is expected to show a 167K rise in employment.

Nevertheless, the ISM report is expected to show service-based activity expanding at a faster pace in May as the index is projected to increase to 53.5 from 53.1 the month prior, while the Fed survey may further dampen the FOMC’s scope to expand the balance sheet further as the district banks take note of a more broad-based recovery in the world’s largest economy.

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DOE U.S. Gasoline Inventories (MAY 31)





Fed Releases Beige Book

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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