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
  • U.S. Dollar: Fed’s Fisher Curbs Speculation For QE3, Raises Rate Expectations

Euro: Weighed By Fears Of Prolonged Recession, Remains Capped By 1.3400

The Euro weakened to 1.3314 on Monday as the 14-year high jobless rate heightened concerns for a prolonged recession, and the single currency may continue to give back the advance from the previous month as the fundamental outlook for the region turns increasingly bleak. At the same time, Italian Prime Minister Mario Monti said the new government considered tapping the region’s rescue fund amid the turmoil in the financial system, and the ongoing risk for contagion reinforces our bearish forecast for the Euro as the sovereign debt crisis continues to drag 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 Ahead Of BoE Rate Decision

The British Pound fell back from a fresh yearly high of 1.6062 amid the shift in market sentiment, but the GBPUSD looks poised to make another run at the 23.6% Fib from the 2009 low to high around 1.6250 as the fundamental outlook for the U.K. improves. Although we have the Bank of England interest rate decision on tap for later this week, the central bank is widely expected to maintain its current policy in April, and market participants may show a muted reaction to the event as the Monetary Policy Committee refrains from releasing a policy statement. As the upward trending channel from earlier this year continues to take shape, the recent weakness in the GBPUSD is likely to be short-lived, and we may see the sterling outperform throughout the year should the BoE look to conclude its easing cycle in 2012.

U.S. Dollar: Fed’s Fisher Curbs Speculation For QE3, Raises Rate Expectations

Although the greenback gained ground against most of its major counterparts, the Dow Jones-FXCM U.S. Dollar Index ( Ticker: USDOLLAR ) slipped to 9,923 amid the recent strength in the Japanese Yen, but the bullish sentiment underlining the reserve currency should gather pace as the Federal Reserve continues to curb expectations for additional monetary support. Indeed, Dallas Fed President Richard Fisher said the FOMC has ‘done enough’ as the economy is in ‘a much better position,’ but went onto say that it’s too early to discuss tightening monetary policy amid the ongoing slack within the private sector. Indeed, it seems as though the Fed is paving the way to start normalizing policy later this year, and we should see the dollar appreciate further in 2012 as interest rate expectations pick up.

--- 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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FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

Fed's James Bullard Speaks on Monetary Policy

--

--

USD

14:00

10:00

Construction Spending (MoM) (FEB)

0.7%

-0.1%

USD

14:00

10:00

ISM Manufacturing (MAR)

53.1

52.4

USD

14:00

10:00

ISM Prices Paid (MAR)

62.3

61.5

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

Hometrack Housing Survey (MoM) (MAR)

--

0.2%

Rises for the first time since June 2010.

GBP

23:01

Hometrack Housing Survey (YoY) (MAR)

--

-1.0%

AUD

23:30

AiG Performance of Manufacturing Index (MAR)

--

49.5

Contracts for the third time in the last six months.

JPY

23:50

Tankan Large Manufacturers Index (1Q)

-1

-4

Fails to grow for the first time since 1Q 2011.

JPY

23:50

Tankan Large Manufacturers Outlook (1Q)

2

-3

JPY

23:50

Tankan Non-Manufacturing Index (1Q)

5

5

JPY

23:50

Tankan Non-Manufacturing Outlook (1Q)

6

5

JPY

23:50

Tankan Large All Industry Capex (1Q)

0.8%

0.0%

AUD

0:30

TD Securities Inflation (MoM) (MAR)

--

0.5%

Slowest pace of growth since October 2009.

AUD

0:30

TD Securities Inflation (YoY) (MAR)

--

1.8%

AUD

1:30

Building Approvals (MoM) (FEB)

0.5%

-7.8%

Biggest decline since October.

AUD

1:30

Building Approvals (YoY) (FEB)

-5.3%

-15.2%

JPY

5:00

Vehicle Sales (YoY) (MAR)

--

78.2%

Largest advance since the series began in 1980.

AUD

6:30

RBA Commodity Price Index (MAR)

--

99.7

Slowest pace of growth since February 2010.

AUD

6:30

RBA Commodity Index SDR (YoY) (MAR)

--

2.7%

CHF

7:15

Retail Sales (Real) (YoY) (FEB)

--

0.8%

Rises for the fifth month.

CHF

7:30

SVME-Purchasing Managers Index (MAR)

49.5

51.1

Expands for the first time since August.

EUR

7:45

Italian Purchasing Manager Index Manufacturing (MAR)

47.6

47.9

Contracts for the fourth time in the last six months.

EUR

7:50

French Purchasing Manager Index Manufacturing (MAR F)

47.6

46.7

EUR

7:55

German Purchasing Manager Index Manufacturing (MAR F)

48.1

48.4

EUR

8:00

Euro-Zone Purchasing Manager Index Manufacturing (MAR F)

47.7

47.7

EUR

8:00

Italian Unemployment Rate s.a. (4Q)

8.7%

8.8%

Highest since 4Q 2001.

EUR

8:00

Italian Unemployment Rate s.a. (FEB P)

9.3%

9.3%

GBP

8:30

Purchasing Manager Index Manufacturing (MAR)

50.7

52.1

Fastest pace of growth since June.

GBP

8:30

Bank of England Housing Equity Withdrawal (Pounds) (4Q)

-8.2B

-8.5B

Falls 8.5B for the second quarter.

EUR

9:00

Euro-Zone Unemployment Rate (FEB)

10.8%

10.8%

Highest since June 1997.
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/04/02/EUR_Fundamentals_Instill_Bearish_Forecast_GBP_Outlook_Hinges_On_BoE.html