Euro To Consolidate Ahead Of Key EU Meeting, BoE Testimony In Focus

By David Song, Currency Analyst

Talking Points

• Euro: Moody’s Announces More Downgrades Ahead Of Key EU Meeting
• British Pound: Moody’s Lowers U.K. Credit Rating Outlook, BoE Softens Dovish Tone
• U.S. Dollar: Index Eyes 50.0% Fib, Outlook Hinges On FOMC Minutes

Euro: Moody’s Announces More Downgrades Ahead Of Key EU Meeting

The Euro slipped to an overnight low of 1.3126 as Moody’s lowered its credit rating for Italy, Malta, Portugal, Slovakia and Spain , and the heightening risk for contagion certainly dampens the appeal of the single currency as European policy makers struggle to address the sovereign debt crisis. Indeed, Moody’s struck a cautious outlook for Spain, stating that it’s ‘skeptical whether the new government will be able to meet its budget goals, and warned that ‘c ontingent risks arising from the banking sector are higher and more likely to crystallize in the case of Spain than among many of its peers’ as the group sees the economy contracting as much as 1.5% in 2012.

Nevertheless, the vote on Greece’s second bailout package certainly presents the biggest event risk for the next 24-hours of trading as European finance ministers are scheduled to meet in Brussels on Wednesday, and we may see a sharp selloff in the exchange rate should we see the group struggle to meet on common ground. Indeed, German Finance Minister Wolfgang Schaeuble said that the EU is better prepared for a Greek default during a TV interview, but pledged to do ‘everything’ to assist Greece as the heightening risk for contagion dampens the fundamental outlook for the euro-area. As market participants await the outcome of the EU meeting, it seems as though the EUR/USD will continue to consolidate with a narrow range, but the technical outlook certainly points to a weaker Euro as price action remains capped by the 100-Day SMA at 1.3327.

British Pound: Moody’s Lowers U.K. Credit Rating Outlook, BoE Softens Dovish Tone

The British Pound tumbled to a fresh monthly low of 1.5684 as Moody’s lowered the U.K. credit rating outlook to negative, and the sterling may face additional headwinds over the near-term as the region faces a risk of a double-dip recession. In turn, market participants speculate that the Bank of England will take additional measures to shore up the ailing economy, but we may see the MPC endorse a wait-and-see approach throughout the first-half of the year as central bank officials expect the recovery to gather pace in the coming months. It seems as though BoE Governor Mervyn King is scaling back his dovish tone for monetary policy as he expects inflation to come in line with the 2% target towards the end of the year, and we may see the central bank head talk down speculation for more quantitative easing the BoE is scheduled to deliver its quarterly inflation report tomorrow at 10:30 GMT. In turn, the recent weakness in the GBP/USD may be short-lived, and the sterling may outperform against its major counter should the BoE look to conclude its easing cycle in 2012.

U.S. Dollar: Index Eyes 50.0% Fib, Outlook Hinges On FOMC Minutes

The greenback continued to gain ground on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR ) advancing to a high of 9,824, and the reserve currency may appreciate further during the North American trade as the flight to safety gathers pace. As the U.S. equity market trades lower, the shift away from risk-taking behavior should prop up the dollar, and the index looks poised to push back above the 50.0% Fibonacci retracement around 9,830 as the relative strength index continues to come off of oversold territory. However, as the FOMC Minutes on tap for Wednesday may dampen the appeal of the USD should the central bank maintain a cautious outlook for the world’s largest economy, and the statement may fuel speculation for another large-scale asset purchase program as Fed Chairman Ben Bernanke keeps the door open to expand the balance sheet further. In contrast, the stickiness in the core rate of inflation may encourage the committee to soften its dovish tone for monetary policy, and we may see a growing rift within the FOMC as the economic recovery gradually gathers pace.

--- 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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F X Upcoming

Currency	GMT	EDT	Release	Expected	Prior
NZD	21:45	16:45	Retail Sales Ex Inflation (QoQ) (4Q)	1.2%	2.2%
USD	22:40	17:40	Fed's Lockhart Speaks on U.S. Economic Outlook	--	--

Currency	GMT	Release	Expected	Actual	Comments
NZD	03:01	REINZ House Sales (YoY) (JAN)	--	25.2%	Highest since October.
NZD	03:01	REINZ House Price Index (MoM) (JAN)	--	-1.4%	Contracts for the second month.
JPY	03:43	Bank of Japan Rate Decision	0.10%	0.10%	Expands asset purchases to JPY 30T
JPY	04:30	Industrial Production (MoM) (DEC F)	--	3.8%	Largest advance since June.
JPY	04:30	Industrial Production (YoY) (DEC F)	--	-4.3%
JPY	04:30	Capacity Utilization (MoM) (DEC F)	--	3.1%
EUR	07:45	French Non-Farm Payrolls (QoQ) (4Q P)	-0.2%	-0.2%	Falls for the first time since 3Q 2009.
EUR	07:45	French Wages (QoQ) (4Q P)	--	0.3%	Holds steady for second quarter.
GBP	09:30	DCLG UK House Prices (YoY) (DEC)	--	0.1%	Rises for the first time since March.
GBP	09:30	Consumer Price Index (MoM) (JAN)	-0.5%	-0.5%	Slowest pace of growth since November 2010. Core rate slowest since July 2010.
GBP	09:30	Core Consumer Price Index (YoY) (JAN)	2.6%	2.6%
GBP	09:30	Consumer Price Index (YoY) (JAN)	3.6%	3.6%
GBP	09:30	Retail Price Index (JAN)	238.40	238.0
GBP	09:30	Retail Price Index (MoM) (JAN)	-0.4%	-0.6%
GBP	09:30	Retail Price Index (YoY) (JAN)	4.1%	3.9%
GBP	09:30	Retail Price Index Ex Mort Int.Payments (YoY) (JAN)	4.2%	4.0%
EUR	10:00	Euro-Zone Industrial Production w.d.a. (YoY) (DEC)	-1.2%	-2.0%	Contracts for the sixth time in 2011.
EUR	10:00	Euro-Zone Industrial Production s.a. (MoM) (DEC)	-1.2%	-1.1%
EUR	10:00	German ZEW Survey (Current Situation) (FEB)	30.5	40.3	Advances to a 10-month high.
EUR	10:00	German ZEW Survey (Economic Sentiment) (FEB)	-11.8	5.4
EUR	10:00	Euro-Zone ZEW Survey (Economic Sentiment) (FEB)	--	-8.1	Highest since July.
EUR	10:00	Portuguese GDP (QoQ) (4Q P)	-1.5%	-1.3%	Contracts for the fifth consecutive quarter.
EUR	10:00	Portuguese GDP (YoY) (4Q P)	-2.8%	-2.7%
USD	12:30	NFIB Small Business Optimism (JAN)	95.0	93.9	Rises for the fifth month.
USD	13:30	Import Price Index (MoM) (JAN)	0.3%	0.3%	Slowest pace of growth since January 2011.
USD	13:30	Import Price Index (YoY) (JAN)	7.2%	7.1%
USD	13:30	Advance Retail Sales (JAN)	0.8%	0.4%	Dragged by drop in auto sales.
USD	13:30	Retail Sales Less Autos (JAN)	0.5%	0.7%
USD	13:30	Retail Sales Ex Auto & Gas (JAN)	0.5%	0.6%
USD	15:00	Business Inventories (DEC)	0.4%	0.4%	Rises for the third month.

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