Euro Dragged Down by Dovish ECB, Pound Traders Eye BoE Report

DailyFX

Talking Points

  • Euro: ECB Warns of Deepening Recession- Further Easing Ahead
  • British Pound: BoE Maintains Current Policy, Inflation Report in Focus
  • U.S. Dollar: Jobless Claims Top Forecast- Wholesale Sales, Inventories on Tap

Euro: ECB Warns of Deepening Recession- Further Easing Ahead

The Euro failed to maintain the overnight advance to 1.3176 as the European Central Bank’s (ECB) monthly report warned of a deepening recession in the monetary union, and the single currency may continue to carve a lower top in the days ahead as the Governing Council remains poised to retain its easing cycle over the near to medium-term.

Although ECB board member Joerg Asmussen warned of keeping the interest rate too low for too long, the ECB said ‘the monetary policy stance will remain accommodative for as long as needed’ as the euro-area is now expected to contract an annualized 0.4% in 2013. Indeed, the Governing Council went onto say that it will ‘start consultations with other European institutions on initiatives to promote a functioning market for asset-backed securities collateralised by loans to non-financial corporations’ in order to encourage private sector lending, and it seems as though the central bank will embark on more non-standard measures later this year as the ‘underlying pace of monetary expansion continues to be subdued.’

As the outlook for growth and inflation deteriorates, it seems as though the ECB will draw up a new program to purchase asset-backed securities in order to encourage lending to small and medium-sized firms, while the benchmark interest rate may get pushed closer to zero as the economic downturn threatens price stability.

As the EURUSD appears to be carving a head-and-shoulders formation, the pair should continue to carve a lower top in May, and would like to see the euro-dollar close back below the 38.2% Fib from the 2009 high to the 2010 low around 1.3120 as we anticipate the reversal pattern to take shape in the days ahead.

British Pound: BoE Maintains Current Policy, Inflation Report in Focus

The British Pound continued to pare the decline from earlier this week and the bullish sentiment surrounding the sterling should gather pace over the near-term as the Bank of England keeps the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B.

Although the Monetary Policy Committee refrained from releasing a policy statement, the BoE Minutes should show another 6-3 split as the central bank appears to be slowly moving away from its easing cycle. As BoE officials anticipate a slow but sustainable recovery in the U.K., we should see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy, and the quarterly inflation report on tap for the following week may further dampen expectations for more quantitative easing should the central bank raise its fundamental assessment for Britain.

As market participants weigh the outlook for monetary policy, the GBPUSD may continue to track sideways ahead of the BoE’s inflation report, while the technical outlook continues to call for further advances as the pair maintains the upward trending channel carried over from March.

U.S. Dollar: Jobless Claims Top Forecast- Wholesale Sales, Inventories on Tap

The greenback appears to be regaining its footing going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)bouncing back from a low of 10,479, and the reserve currency may continue to track higher over the remainder of the week as the fundamental outlook for the U.S. improves.

Indeed, U.S. Initial Jobless Claims narrowed to 323K in the week ending May 3 to mark the lowest reading since January 2008, while Continuing Claims slipped to 3005K amid forecasts for a 3018K print. As the developments coming out of the world’s largest economy encourages an improved outlook for growth, we should see a growing number of Fed officials scale back their willingness to expand the balance sheet further, and the central bank may start to look at a tentative exit strategy later this year as the recovery gradually gathers pace.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

GBP

14:00

10:00

NIESR GDP Estimate (Apr)

0.1%

USD

14:00

10:00

Wholesale Inventories (Mar)

0.4%

-0.3%

USD

14:30

10:30

Wholesale Sales MoM (Mar)

0.1%

1.7%

USD

17:15

13:15

Fed's Plosser Speaks on Monetary Policy in New York

--- 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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