Bearish Euro Formation Taking Shape, Sterling Threatens Upward Trend

By David Song, Currency Analyst

Talking Points
  • Euro: Slips Below 1.3000 As Borrowing Costs In Spain Top Pre-LTRO Levels
  • British Pound: Threatens Upward Trend, Range-Bound Price Ahead
  • U.S. Dollar: Risk Sentiment Turns Around, Fed Rhetoric In Focus

Euro: Slips Below 1.3000 As Borrowing Costs In Spain Top Pre-LTRO Levels

The Euro slipped to a fresh monthly low of 1.2994 as the yield tied to Spain’s 10-Year debt climbed to the highest level since the European Central Bank conducted its first Long-Term Refinancing Operation in December, and we should see the Governing Council take additional steps to shore up the ailing economy as the governments operating under the single currency become increasingly reliant on monetary support. Indeed, European policy makers are looking to broaden the powers of the ECB as the sovereign debt crisis continues to drag on the real economy and President Mario Draghi may have little choice but to expand the balance sheet further as the EU argues against strengthen the bailout funds for the region.

As the LTRO’s appear to be having a limited impact, European Union Economic and Monetary Affairs Commissioner Olli Rehn called for ‘s ignificant restructuring efforts ’ across the commercial banks in Europe, but we may see financial institutions continue to horde cash as the heightening risk for contagion continues to dampen the fundamental outlook for the region. As the descending triangle in the EURUSD continues to take shape, the pair appears to have carved out a lower top 1.3200, and the bearish formation may generate a sharp selloff in the exchange rate as price action approaches the apex. Nevertheless, we are waiting for a close below 1.3000 to see the downward momentum gather pace, and we expect the pair to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as it struggles to maintain the advance from earlier this year.

British Pound: Threatens Upward Trend, Range-Bound Price Ahead

The British Pound pared the overnight decline to 1.5818 to maintain the range-bound price action from earlier this month, and the pair appears to be building a short-term base to make another run at 1.6000. As the GBPUSD struggles to maintain the upward trending channel from earlier this year, we may see the pair track sideways over the near-term, but the Bank of England Minutes may instill a bullish outlook for the sterling should the central bank continue to soften its dovish tone for monetary policy. Although board members David Miles and Adam Posen are expected to vote for another GBP 25B in quantitative easing, the majority of the Monetary Policy Committee may strike an improved outlook for the region, and the central bank may endorse a wait-and-see approach throughout 2012 as BoE officials anticipate to see a stronger recovery later this year. In turn, we may see the GBPUSD hold steady ahead of the BoE Minutes, but the fresh batch of central bank rhetoric should heavily influence the British Pound as market participants weigh the prospects for future policy.

U.S. Dollar: Risk Sentiment Turns Around, Fed Rhetoric In Focus

The greenback continued to recoup the losses from earlier this month, with the with the Dow Jones-FXCM U.S. Dollar Index ( Ticker: USDOLLAR ) climbing to an overnight high of 9,998, but the reserve currency is struggling to hold its ground as there appears to be a shift in market sentiment. As the U.S equity market opens higher, we may see risk sentiment rebound throughout the North American trade, but the slew of Fed rhetoric on tap for later today may prop up the dollar should the central bank continue to cast an improved outlook for the world’s largest economy. Indeed, the resilience in private sector consumption may encourage the FOMC to soften its dovish tone for monetary policy, and we expect the central bank to conclude its easing cycle in 2012 as the recovery gets on a more sustainable path.

--- 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

Business Inventories (FEB)

0.6%

0.7%

USD

14:00

10:00

NAHB Housing Market Index (APR)

28.0

28.0

EUR

16:30

12:30

ECB's Ewald Nowotny Speaks on Euro Economy

USD

16:30

12:30

Fed's Sandra Pianalto Speaks on U.S. Banking, Economy

USD

19:30

15:30

Fed's James Bullard Speaks on U.S. Economy, Monetary Policy

Currency

GMT

Release

Expected

Actual

Comments

NZD

12:00

REINZ House Sales (YoY) (MAR)

--

25.3%

Slows for the first time since November.

NZD

12:00

REINZ Housing Price Index (MAR)

--

3343.5

Advances for the second straight month.

NZD

12:00

REINZ Housing Price Index (MoM) (MAR)

--

1.9%

NZD

22:30

Performance Services Index (MAR)

--

53.9

Slows for the first time since December.

NZD

22:45

Food Prices (MoM) (MAR)

--

-1.0%

Declines for the first time since October.

GBP

23:01

Rightmove House Prices (MoM) (APR)

--

2.9%

Fastest pace of growth since August 2010.

GBP

23:01

Rightmove House Prices (YoY) (APR)

--

3.4%

JPY

5:30

Tokyo Department Store Sales (YoY) (MAR)

--

26.7%

Highest since records began in 1990.

JPY

5:30

Nationwide Department Store Sales (YoY) (MAR)

--

14.1%

Highest since March 1997.

CHF

7:15

Producer & Import Prices (MoM) (MAR)

0.5%

0.3%

Slowest pace of growth since January.

CHF

7:15

Producer & Import Prices (YoY) (MAR)

-1.8%

-2.0%

EUR

8:00

Italian Trade Balance (Total) (euros) (FEB)

-1337M

-1113M

Smallest deficit since the surplus in December.

EUR

8:00

Italian Trade Balance EU (euros) (FEB)

--

439M

EUR

8:30

Italian Government Debt (FEB)

--

1928.2B

Narrows for the first time since December.

EUR

9:00

Euro-Zone Trade Balance s.a. (euros) (FEB)

5.0B

3.7B

Smallest deficit since October.

EUR

9:00

Euro-Zone Trade Balance (euros) (FEB)

3.0B

2.8B

CAD

12:30

International Securities Transactions (Canadian dollar) (FEB)

4.00B

12.49B

Highest since October.

USD

12:30

Empire Manufacturing (APR)

18.00

6.56

Lowest since November.

USD

12:30

Advance Retail Sales (MAR)

0.3%

0.8%

Advances for the tenth consecutive month.

USD

12:30

Advance Retail Sales Less Autos (MAR)

0.6%

0.8%

USD

12:30

Advance Retail Sales Less Autos & Gas (MAR)

0.5%

0.7%

USD

12:30

Advance Retail Sales "Control Group" (MAR)

0.5%

0.4%

USD

13:00

Total Net TIC Flows (FEB)

$30.0B

$107.7B

Highest since March 2011.

USD

13:00

Net Long-term TIC Flows (FEB)

$40.0B

$10.1B
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/04/16/Bearish_Euro_Formation_Taking_Shape_Sterling_Threatens_Upward_Trend.html