Euro Optimism To Be Short-Lived, Sterling To Consolidate Further

By David Song, Currency Analyst

Talking Points
  • Euro: All Eyes On EU Meeting, ECB To Swap Greek Bond Holdings
  • British Pound: Higher Consumption To Spur Stronger Recovery, BoE To Stay On Hold
  • U.S. Dollar: Weakness To Be Short-Lived AS Sticky Inflation Dampens Scope For QE3

Euro: All Eyes On EU Meeting, ECB To Swap Greek Bond Holdings

The Euro advanced to an overnight high of 1.3196 on hopes that the EU will release the second bailout package for Greece at the meeting scheduled for Monday, while the European Central Bank is expected to swap its Greek bond-holdings in part of the debt restructuring plan. Indeed, the extraordinary event may set precedence for Portugal as the region continues to cope with high long-term funding costs, and European policy makers could be forced to offer additional assistance to the periphery countries as the region slips back into recession.

However, we saw Bundesbank President Jens Weidmann argue against the move as it violates the central bank’s mandate, and we may see risk sentiment deteriorate in the following week should European policy makers struggle to meet on common ground. Beyond the EU meeting on tap for next week, there’s concerns that German officials may soften their support for the EUR 130B bailout as the lower house of parliament is scheduled to vote on the package on February 27, and the single currency remains poised to face additional headwinds over the near-term as the sovereign debt crisis continues to weigh on the fundamental outlook for the euro-area. As the EUR/USD extends the rebound from 1.3079, optimism surrounding the EU meeting could spark another run at the 100-Day SMA (1.3314), but we will maintain our call to see the exchange rate fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the sovereign debt crisis remains far from being resolved.

British Pound: Higher Consumption To Spur Stronger Recovery, BoE To Stay On Hold

The British Pound advanced to a high of 1.5861 following the better-than-expected retail sales report coming out of the U.K., but the failed run at the 200-Day SMA (1.5921) could produce a short-term correction in the exchange rate as it maintains the range from earlier this month. In light of the recent developments coming out of Britain, we may see the Bank of England continue to soften its dovish tone for monetary policy, and the Monetary Policy Committee may endorse a wait-and-see approach throughout the first-half of the year as central bank officials expect to see a stronger recovery in 2012. As market participants weigh the outlook for monetary policy, we may see the GBP/USD continue to face range-bound prices over the near-term, but the sterling may continue to recoup the losses from the previous year should the BoE look to conclude its easing cycle this year.

U.S. Dollar: Weakness To Be Short-Lived AS Sticky Inflation Dampens Scope For QE3

The greenback came under pressure on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR ) slipping to an overnight low of 9,787, but it seems as though the reserve currency is regaining its footing during the North American trade as the rise in market sentiment tapers off. As global equity prices come off of their highs, the shift in risk-taking behavior should prop up the USD, and we maintain a bullish outlook for the greenback as the developments coming out of the world’s largest economy dampens the scope for another large-scale asset purchase program. Indeed, the stickiness in consumer prices will become a growing concern for the Federal Reserve as the recovery gathers pace, and we should see the FOMC continue to soften its dovish tone for monetary policy as the outlook for growth and inflation picks up. In turn, the recent weakness in the USD is likely to be short-lived, and we expect the USDOLLAR to extend the rebound from 9,672 as bets for QE3 diminish.

--- 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

USD

15:00

10:00

Leading Indicators

0.5%

0.4%

Currency

GMT

Release

Expected

Actual

Comments

EUR

07:00

German Producer Prices (MoM) (JAN)

0.3%

0.6%

Slowest pace of growth since August 2010.

EUR

07:00

German Producer Prices (YoY) (JAN)

3.2%

3.4%

EUR

09:00

Euro-Zone Current Account n.s.a. (euros) (DEC)

--

16.3B

Marks the second surplus for 2011.

EUR

09:00

Euro-Zone Current Account s.a. (euros) (DEC)

--

2.0B

GBP

09:30

Retail Sales ex Auto Fuel (MoM) (JAN)

-0.3%

1.2%

Consumption advances the most since April.

GBP

09:30

Retail Sales ex Auto Fuel (YoY) (JAN)

-0.1%

1.9%

GBP

09:30

Retail Sales w/Auto Fuel (MoM) (JAN)

-0.3%

0.9%

GBP

09:30

Retail Sales w/Auto Fuel (YoY) (JAN)

0.5%

2.0%

EUR

10:00

Euro-Zone Construction Output s.a. (MoM) (DEC)

--

0.3%

Rises for the second consecutive month.

EUR

10:00

Euro-Zone Construction Output w.d.a. (YoY) (DEC)

--

7.8%

CAD

12:00

Consumer Price Index (MoM) (JAN)

0.3%

0.4%

The uptick in price growth could force the BoC to hike rates in 2012.

CAD

12:00

Consumer Price Index (YoY) (JAN)

2.3%

2.5%

CAD

12:00

Bank Canada CPI Core (MoM) (JAN)

0.1%

0.2%

CAD

12:00

Bank Canada CPI Core (YoY) (JAN)

1.9%

2.1%

CAD

12:00

Consumer Price Index (JAN)

--

120.7

CAD

13:30

Leading Indicators (MoM) (JAN)

0.6%

0.7%

Rises for the seventh month.

USD

13:30

Consumer Price Index (MoM) (JAN)

0.3%

0.2%

Core rate of inflation rises at the fastest pace since September 2008, limiting scope for QE3.

USD

13:30

CPI Ex Food & Energy (MoM) (JAN)

0.2%

0.2%

USD

13:30

Consumer Price Index (YoY) (JAN)

2.8%

2.9%

USD

13:30

CPI Ex Food & Energy (YoY) (JAN)

2.2%

2.3%

USD

13:30

Consumer Price Index n.s.a. (JAN)

226.57

226.665

USD

13:30

Consumer Price Index Core Index s.a. (JAN)

--

227.684
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/02/17/Euro_Optimism_To_Be_Short-Lived_Sterling_To_Consolidate_Further.html