EUR Bearish Outlook Reinforced By ECB, GBP Still Needs To Test 1.6000

By David Song, Currency Analyst

Talking Points
  • Euro: ECB Maintains Balanced Tone, Preserves Easing Cycle
  • British Pound: Correction To Gather Pace, BoE Rate Decision Comes Into Focus
  • U.S. Dollar: Advances Ahead Of NFPs, FOMC To Adopt Hawkish Tone

Euro: ECB MaintainsBalanced Tone, Preserves Easing Cycle

The Euro bounced back from an overnight low of 1.3096 asthe ECB held the benchmark interest rate at 1.00% and talked downspeculation for additional monetary support, but it seems as thoughthe Governing Council will carry its easing cycle into thefollowing year as it remains premature for the central bank toembark on an exit strategy. Indeed, ECB President Mario Draghitried to talk down the risks surrounding the region as the centralbank expects to see a gradual recovery across the region, butwarned that the fundamental outlook for the region has becomeincreasingly uncertain amid the ongoing turmoil in the financialsystem.

Based on the recent comments, it seems as though the Governing Council remains open to expand monetary policy further in the second-half of the year, and we should see the central bank take additional steps to shore up the ailing economy as the risk for inflation remains ‘broadly balanced.’ As the region continues to face a risk for a prolonged recession, the slowing recovery could dampen price growth throughout 2012, and the weakening outlook for the region continues to reinforce a bearish outlook for the single currency as European policy makers maintain a reactionary approach in addressing the risks surrounding the region. As the EURUSD continues to approach the apex of the descending triangle, we are still waiting for a break of 1.3000 for a larger move to the downside, and we will look to sell rallies in the euro-dollar as the fundamental outlook for the region turns increasingly bleak.

British Pound: Correction To GatherPace, BoE Rate Decision Comes Into Focus

The British Pound continued to consolidate on Thursday,with the GBPUSD slipping to an overnight low of 1.6158, and theshort-term correction should gather pace in the days ahead as therelative strength index continues to come off of overboughtterritory. However, as the Bank of England decision on tap for May10 comes into focus, the fresh batch of comments from the centralbank should prop up the sterling, and we may see the GBPUSD fallback towards 1.6000 – former resistance – before itresumes the upward trend from earlier this year. As we see the BoEmoving away from its easing cycle, the shift in the policy outlookshould prop up the British Pound, and we expect to see fresh yearlyhighs in the GBPUSD as the Monetary Policy Committee sees anincreased risk for inflation.

U.S. Dollar: Advances Ahead OfNFPs, FOMC To Adopt Hawkish Tone

The greenback tracked higher ahead of the highly anticipatedNon-Farm Payrolls report , with the Dow Jones-FXCM U.S. Dollar Index(Ticker: USDOLLAR ) rallying to a high of 9,923, and the reservecurrency may continue to retrace the decline from the previousmonth should we see a marked improvement in the labor market.Indeed, the drop in initial and continuing jobless claims certainlybodes well for NFP’s, and a strong print could spark a sharprally in the greenback as it dampens expectations for another roundof quantitative easing. In turn, we should see the FOMC sound morehawkish going into the second-half of the year, and the committeemay start to outline a tentative exit strategy as the more robustrecovery 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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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/05/03/EUR_Bearish_Outlook_Reinforced_By_ECB_GBP_Still_Needs_To_Test_1.6000.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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