Euro At Risk Amid Fears Of Prolonged Recession, Pound To Outperform

By David Song, Currency Analyst

Talking Points
  • Euro: Weighed By Fears Of Prolonged Recession, Remains Capped By 1.3400
  • British Pound: Eyes 23.6% Fib Ahead Of BoE Rate Decision

Euro: Weighed By Fears OfProlonged Recession, Remains Capped By 1.3400

The Euro weakened to 1.3314 on Monday as the14-year high jobless rate heightened concerns for a prolongedrecession, and the single currency may continue to give back theadvance from the previous month as the fundamental outlook for theregion turns increasingly bleak. At the same time, Italian PrimeMinister Mario Monti said the new government considered tapping theregion’s rescue fund amid the turmoil in the financialsystem, and the ongoing risk for contagion reinforces our bearishforecast for the Euro as the sovereign debt crisis continues todrag on the economy.

As the EU makes a greater push to balance its public finances, the major shift in fiscal policy certainly dampens the outlook for growth, and we may see the European Central Bank continue to shore up the region as the governments operating under the single currency become increasingly reliant on monetary support. Although the ECB is widely expected to keep the benchmark interest rate at 1.00% later this week, President Mario Draghi may talk up speculation for a potential rate cut, and a dovish policy statement could threaten the range-bound price action in the EURUSD as the central bank looks to extend its easing cycle. As the EURUSD marks another failed run at 1.3400, the pair looks poised for a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, but we are likely to see the euro face additional headwinds throughout the year as European policy makers struggle to swiftly address the risks surrounding the region.

British Pound: Eyes 23.6% Fib AheadOf BoE Rate Decision

The British Pound fell back from a fresh yearly high of 1.6062amid the shift in market sentiment, but the GBPUSD looks poised tomake another run at the 23.6% Fib from the 2009 low to high around1.6250 as the fundamental outlook for the U.K. improves. Althoughwe have the Bank of England interest rate decision on tap for laterthis week, the central bank is widely expected to maintain itscurrent policy in April, and market participants may show a mutedreaction to the event as the Monetary Policy Committee refrainsfrom releasing a policy statement. As the upward trending channelfrom earlier this year continues to take shape, the recent weaknessin the GBPUSD is likely to be short-lived, and we may see thesterling outperform throughout the year should the BoE look toconclude its easing cycle in 2012.

More to Follow...

--- 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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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/04/02/Euro_At_Risk_Amid_Fears_Of_Prolonged_Recession_Pound_To_Outperform.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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