Euro Fundamentals Setting Stage For Major Downturn – 1.3000 Crucial

By David Song, Currency Analyst

Talking Points
  • Euro: Italy & Spain Too Big To Be Saved, S&P Sees Risk Of Complacency Trap
  • British Pound: Retail Sales Slumps, Short-Term Correction To Gather Pace
  • U.S. Dollar: Fed’s Bullard Sees Inflationary Risks, More Central Bank Rhetoric On Tap

Euro: Italy & Spain Too Big To Be Saved, S&P Sees Risk Of Complacency Trap

The Euro slipped to a fresh weekly low of 1.3132 as manufacturing and service-based activity weakened in March, and we should see the head-and-shoulders top continue to take shape as the fundamental outlook for the region turns increasingly bleak. Indeed, a German Finance Ministry official said the EU will discuss a ‘temporary increase’ in the bailout fund as the European periphery continue to face high financing costs, but argued that the group should focus on increasing the credibility of the firewall as Italy and Spain remains ‘too big to be saved.’

At the same time, an analyst at Standard and Poor’s fired warning shots against Italy, stating that the region continues to face ‘very large financial requirements,’ and went onto say that the biggest risk surrounding the region ‘ would be to fall into the trap of complacency ’ as European policy makers become increasingly reliant on monetary support. As the sovereign debt crisis continues to dampen the outlook for the euro-area, the European Central Bank may continue to carry out its easing cycle in 2012, and we may see the bearish sentiment underlining the single currency gather pace over the near-term as European policy makers struggle to shore up investor confidence. However, we may see the EURUSD consolidate going into the end of the week as the exchange rate continues to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, and we will wait for a break and a close below 1.3000 to see the major reversal pattern pan out. In turn, we may have an opportunity to sell the pair before the major reversal pattern takes shape, and we will maintain a bearish outlook for the EURUSD as European policy makers maintain a reactionary approach in addressing the debt crisis.

British Pound: Retail Sales Slumps, Short-Term Correction To Gather Pace

The British Pound fell to an overnight low of 1.5769 amid the larger-than-expected drop in retail sales, and the GBPUSD should continue to consolidate over the remainder of the week following the failed run at 1.6000. As the soft batch of data coming out of the U.K. dampens the outlook for growth, we should see the Bank of England maintain a wait-and-see approach throughout the first-half of the year, but the Monetary Policy Committee may keep the door open to expand its balance sheet further as the central bank aims to encourage a stronger recovery. As the GBPUSD maintains the range from earlier this month, the short-term correction could produce another test of 1.5600, but we may see the pound-dollar give back the rally from earlier this year as the relative strength index maintains the downward trend carried over from the previous month.

U.S. Dollar: Fed’s Bullard Sees Inflationary Risks, More Central Bank Rhetoric On Tap

The greenback gained ground on Thursday, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR ) advancing to a fresh weekly high of 10,032, and the reserve currency may track higher going into the end of the week as the shift away from risk-taking behavior gathers pace. As fears surrounding the global economy continue to bear down on market sentiment, the flight to safety should prop up demands for the USD, and we may see the dollar appreciate further during the North American trade should Fed officials talk down speculation for more quantitative easing. Indeed, St. Louis Fed President James Bullard struck a hawkish tone during an interview with the Wall Street Journal as he expects inflationary pressures to pick up this year, and we may see the Fed conclude its easing cycle in 2012 as the more robust recovery paired with the stickiness in price growth raises the risk for inflation.

--- 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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Related Articles: Weekly Currency Trading Forecast

F X Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

15:00

11:00

Euro-Zone Consumer Confidence

-19.80

-20.30

USD

16:45

12:45

Fed Chairman Ben Bernanke Speaks on Monetary Policy

--

--

USD

20:00

16:00

Fed's Charles Evans Speaks on U.S. Economy

--

--

USD

00:00

20:00

Fed's James Bullard Speaks on U.S. Economy

--

--

Currency

GMT

Release

Expected

Actual

Comments

JPY

19:50

Merchandise Trade Balance Total (Yen) (FEB)

-120.0B

32.9B

Marks first surplus since September.

JPY

19:50

Adjusted Merchandise Trade Balance (Yen) (FEB)

-342.5B

-313.2B

JPY

19:50

Merchandise Trade Exports (YoY) (FEB)

-6.5%

-2.7%

JPY

19:50

Merchandise Trade Imports (YoY) (FEB)

8.2%

9.2%

CNY

22:30

HSBC Flash China Manufacturing PMI (MAR)

--

48.1

Contracts for the fifth month.

JPY

01:00

Supermarket Sales (YoY) (FEB)

--

0.3%

Rises for the first time since July.

CHF

03:00

Trade Balance (Swiss franc) (FEB)

1.80B

2.68B

Largest surplus since November.

CHF

03:00

Exports (MoM) (FEB)

0.3%

9.2%

CHF

03:00

Imports (MoM) (FEB)

--

-12.3%

EUR

04:00

French PMI Manufacturing (MAR P)

50.3

47.6

Contracts for the fifth time in the last six months.

EUR

04:00

French PMI Manufacturing (MAR P)

50.2

50.0

EUR

04:30

German PMI Manufacturing (MAR A)

51.0

48.1

Contracts for the fourth time in the last six months.

EUR

04:30

German PMI Services (MAR A)

53.1

51.8

EUR

05:00

Euro-Zone PMI Composite (MAR A)

49.6

48.7

Lowest since November, contracts for second month.

EUR

05:00

Euro-Zone PMI Manufacturing (MAR A)

49.5

47.7

EUR

05:00

Euro-Zone PMI Services (MAR A)

49.2

48.7

GBP

05:30

Retail Sales (MoM) (FEB)

-0.5%

-0.8%

Falls for the first time in three months.

GBP

05:30

Retail Sales (YoY) (FEB)

2.3%

1.0%

GBP

05:30

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

-0.5%

-0.8%

GBP

05:30

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

2.4%

1.0%

EUR

06:00

Euro-Zone Industrial New Orders (YoY) (JAN)

-3.1%

-3.3%

Largest decline since September.

EUR

06:00

Euro-Zone Industrial New Orders s.a. (MoM) (JAN)

-2.2%

-2.3%

CAD

08:30

Retail Sales (MoM) (JAN)

1.8%

0.5%

Rises for the fifth time in the last six months.

CAD

08:30

Retail Sales Less Autos (MoM) (JAN)

0.5%

-0.5%

USD

08:30

Initial Jobless Claims (MAR 17)

350K

348K

Lowest since 2008.

USD

08:30

Continuing Claims (MAR 10)

3380K

3352K

USD

10:00

House Price Index (MoM) (JAN)

0.3%

0.0%

Fails to grow for the first time since October.

USD

10:00

Leading Indicators (FEB)

0.6%

0.7%

Rises for the fifth month.
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/03/22/Euro_Fundamentals_Setting_Stage_For_Major_Downturn_1.3000_Crucial.html