Euro At Risk Amid Heightening Concerns, USD Rebound To Accelerate

By David Song, Currency Analyst

Talking Points
  • Euro: Germany To Review Firewalls In March, ECB Deposits Hit Record-High
  • British Pound: Maintains Range, U.K. Recovery To Gather Pace
  • U.S. Dollar: China Growth To Slow, ISM Non-Manufacturing On Tap

Euro: Germany To ReviewFirewalls In March, ECB Deposits Hit Record-High

The Euro bounced back from an overnight low 1.3159 as Germany pledged to resume talks on increasing the scope of the European Stability Mechanism, but the rebound in the EURUSD may be short-lived as Greece struggles to strike a deal with private creditors. DSW, an investor protection group in Germany, spoke out against the debt deal and argued that investors should reject the agreement, and the heightening risk of a Greek default could spark another selloff in the exchange rate as the fundamental outlook for the region turns increasingly bleak.

As the euro-area slipsback into recession, the European Central Bank is likely tomaintain a dovish outlook for monetary policy, but we may seePresident Mario Draghi strike a more balanced tone for the regionfollowing the second Long Term RefinancingOperation . However, it seems asthough the LTRO may not be having the desired effect as overnightdeposits to the ECB surged to a record-high of EUR 820.8B, and theGoverning Council may have little choice but to expand policyfurther in 2012 as the region remains vulnerable to future shocks.Nevertheless, as the EURUSD holds above the 38.2% Fibonacciretracement from the 2009 high to the 2010 low around 1.3100, wemay see the exchange rate make another run at the 50.0% Fib(1.3500) ahead of the ECB rate decision, but dovish comments comingout of the ECB could sink the single currency as marketparticipants see the central bank pushing the benchmark interestrate below 1.00% over the coming months. In turn, we may see theEURUSD trade lower going into the end of the week, and the pair maythreaten the upward trend from earlier this year as the debt crisiscontinues to drag on investor confidence.

British Pound: Maintains Range, U.K. Recovery To Gather Pace

The British Pound pared the decline to 1.5784 to maintain the range carried over from the previous month, and the sterling may continue to track sideways over the near-term as market participants weigh the fundamental outlook for the U.K. Indeed, currency traders may turn a blind eye to the Bank of England rate decision as the central bank is widely anticipated to revert back to a wait-and-see approach, but the slew of even risk on tap for later this week may push the GBPUSD as the data is expected to highlight a more robust recovery for the U.K. In turn, a round of positive developments could push the British Pound back towards 1.6000, and the GBPUSD may continue to retrace the decline from the previous year should we see the BoE look to conclude its easing cycle in 2012.

U.S. Dollar: China Growth To Slow, ISM Non-Manufacturing On Tap

The greenback gainedground during the overnight trade as China lowered its 2012 growthforecast to 7.5% from 8.0%, and the shift away from risk-takingbehavior may pick back up during the North American session shouldthe U.S. ISM Non-Manufacturing report fall short of marketexpectations. Indeed, service-based activity in the world’slargest economy is projected to expand at a slower pace inFebruary, but a below-forecast print could weigh on marketsentiment as it dampens the outlook for global growth. In turn, wemay see the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR ) pare the decline to9,869, and the reserve currency may trend higher over the comingdays as it carves out a higher low coming into March.

--- Written by David Song, CurrencyAnalyst

To contact David , e-mail dsong @dailyfx.com. Follow meon Twitter at @ DavidJSong

To be added to David 's e-mail distributionlist, send an e-mail with subject line "Distribution List"to dsong @dailyfx.com.

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/03/05/Euro_At_Risk_Amid_Heightening_Concerns_USD_Rebound_To_Accelerate_.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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