Euro Forecast Weighed By Contagion Threats, Sterling Building Base

By David Song, Currency Analyst

Talking Points
  • Euro: Spanish Yields Approach 6%, Banks May Need More Capital
  • British Pound: Continues To Build Base Around 1.5800 Ahead Of Key Event Risk s
  • U.S. Dollar: Upward Trending Channel Continues To Take Shape, Fed Rhetoric In Focus

Euro: Spanish Yields Approach 6%, Banks May Need More Capital

The Euro slipped to an overnight low of 1.3058 as heightening finance costs across the periphery countries raised the threat for contagion, and the single currency is likely to face additional headwinds over the near-term as the region continues to face a risk for a prolonged recession. Indeed, Bank of Spain Governor Miguel Angel Fernandez Ordonez warned commercial banks may require more capital if the ‘ economy worsened more than expected ,’ and went onto say that the region is likely to face a protracted recovery as the government sees the growth rate contracting 1.7% in 2012.

As the European Central Bank’s Long Term Refinancing Operations appear to be having a limited impact in addressing the debt crisis, President Mario Draghi may look to target the benchmark interest rate, and the Governing Council may have little choice but to carry out its easing cycle throughout the year as the governments operating under the single currency become increasingly reliant on monetary support. As the fundamental outlook for the euro-area deteriorates, we maintain our bearish outlook for the EURUSD, but the pair may continue to track sideways over the remainder of the week as it appears to be building a short-term base around 1.3000. However, the lack of momentum to push back above the 100-Day SMA (1.3145) certainly raises the risk for a bearish breakdown in the exchange rate, and we may see the pair continue to threaten interim support around 1.3000 as European policy makers struggle to shore up investor confidence.

British Pound: Continues To Build Base Around 1.5800 Ahead Of Key Event Risks

The British Pound pared the overnight decline to 1.5808 to maintain the range from earlier this month, and the GBPUSD may track higher over the remainder of the week as the upward trending channel from earlier this year continues to take shape. As the pound-dollar carves out a higher low around 1.5800, we expect to see a fresh yearly high over the coming days, but we may see the sterling struggle to hold its ground over the next 24-hours of trading as the economic docket is expected to reinforce a weakened outlook for the U.K. In turn, we may see the GBPUSD track sideways going into the middle of the week, but we will maintain our bullish call for the pound-dollar as the pair continues to mark higher highs paired with higher lows.

U.S. Dollar: Upward Trending Channel Continues To Take Shape, Fed Rhetoric In Focus

The greenback is struggling to hold its ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index ( Ticker: USDOLLAR ) giving back the overnight advance to 10,008, but we may see the reserve currency regain its footing later today as the shift away from risk-taking behavior gathers pace. As the U.S. equity market opens lower, the drop in risk appetite should prop up the dollar over the next 24-hours of trading, and currency traders may turn increasingly bullish against the USD should Fed officials continue to talk down speculation for another round of quantitative easing. With the slew of central bank rhetoric on tap for Tuesday, the fresh batch of comments from the central bank is likely to influence the reserve currency, and we should see the upward trending channel in the USDOLLAR continue to take shape 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

IBD/TIPP Economic Optimism (APR)

47.5

USD

14:00

10:00

Wholesale Inventories (FEB)

0.5%

0.4%

EUR

15:30

11:30

ECB's Ewald Nowotny Speaks on Euro Economy

USD

16:30

12:30

Fed's Richard Fisher Speaks on U.S. Economy

USD

16:45

12:45

Fed's Dennis Lockhart Speaks on Financial Reform

USD

18:30

14:30

Fed's Narayana Kocherlakota Speaks on U.S. Economy

NZD

22:00

18:00

NZIER Business Opinion Survey (1Q)

0.0

GBP

23:01

19:01

BRC Sales Like-For-Like (YoY) (MAR)

0.0%

-0.3%

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

AiG Performance of Construction Index (MAR)

--

36.2

Contracts for 22 straight months.

AUD

1:30

NAB Business Conditions (MAR)

--

4

Rises for the first time in two-months.

AUD

1:30

NAB Business Confidence (MAR)

--

3

AUD

1:30

ANZ Job Advertisements (MoM) (MAR)

--

1.0%

Increases for the third month.

CNY

3:03

Trade Balance (USD) (MAR)

-$3.15B

$5.35B

Back in surplus on softer imports.

CNY

3:03

Exports (YoY) (MAR)

7.0%

8.9%

CNY

3:03

Imports (YoY) (MAR)

9.0%

5.3%

JPY

3:09

Bank of Japan Interest Rate Decision

0.10%

0.10%

Maintains current policy.

CHF

5:45

Unemployment Rate s.a. (MAR)

3.1%

3.1%

Holds steady for the fourth month.

CHF

5:45

Unemployment Rate (MAR)

3.3%

3.2%

EUR

6:00

German Trade Balance (euros) (FEB)

12.0B

14.7B

Largest surplus since November as exports rose for the second month.

EUR

6:00

German Current Account (euros) (FEB)

12.0B

11.1B

EUR

6:00

German Exports s.a. (MoM) (FEB)

-1.2%

1.6%

EUR

6:00

German Imports s.a. (MoM) (FEB)

1.3%

3.9%

JPY

6:00

Machine Tool Orders (YoY) (MAR P)

--

2.4%

Rises for the first time since December.

AUD

6:30

Foreign Reserves (Australian dollar) (MAR)

--

49.9B

Highest since August 2009.

EUR

6:30

Bank of France Business Sentiment (MAR)

96.0

95.0

Holds steady for second month.

EUR

6:45

French Industrial Production (MoM) (FEB)

0.3%

0.3%

Rises for the second month.

EUR

6:45

French Industrial Production (YoY) (FEB)

-1.2%

-1.9%

EUR

6:45

French Manufacturing Production (MoM) (FEB)

0.0%

-1.2%

Contracts for the third straight month.

EUR

6:45

French Manufacturing Production (YoY) (FEB)

-1.7%

-3.7%

EUR

8:30

Euro-Zone Sentix Investor Confidence (APR)

-9.1

-14.7

Lowest since January.

USD

11:30

NFIB Small Business Optimism (MAR)

95.0

92.5

Lowest since November.
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/04/10/Euro_Forecast_Weighed_By_Contagion_Threats_Sterling_Building_Base.html