Euro Eyes Fresh Lows on ECB Policy- Pound to Face 1Q GDP


Talking Points

  • Euro: German IFO Survey Disappoints, ECB Warns of Lower Lending
  • British Pound: BoE Extends FLS, 1Q GDP Report in Focus
  • U.S. Dollar: Demands for Durable Goods Contract More-Than-Expected

Euro: German IFO Survey Disappoints, ECB Warns of Lower Lending

The Euro slipped to an overnight low of 1.2953 as the German IFO Business Confidence survey slipped to 104.4 in April amid forecast for a 106.2 print, while the European Central Bank (ECB) struck a cautious outlook for the region amid the persistent slack in the real economy.

Although the ECB saw credit standards tightening less during the first three-months of the year, the central bank anticipates private sector lending to deteriorate further in the second-quarter, and it seems as though the Governing Council is coming under increased pressure to ease monetary policy further as the euro-area remains mired in a recession.

In turn, a growing number of commercial banks see the ECB pushing the benchmark interest rate to a fresh record-low at the May 2 meeting, but the central bank may have little choice but to carry out its easing cycle throughout 2013 as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

As the EURUSD carves a lower top around the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we’re seeing a head-and-shoulders formation take shape, and the pair may ultimately work its way back towards the 23.6% retracement (1.2640-50) as the fundamental outlook for the euro-area continues to deteriorate.

British Pound: BoE Extends FLS, 1Q GDP Report in Focus

The British Pound climbed to 1.5286 as the Bank of England (BoE) announced plans to extend the Funding for Lending Scheme for another year, and the sterling may continue to track sideways ahead of the next policy meeting on May 9 as the central bank sticks to the sidelines.

Moreover, the BoE said the FLS will also include some non-bank lenders to help encourage a stronger recovery, and it seems as though the Monetary Policy Committee will keep its asset purchase program capped at GBP 375B as the central bank sees a slow but sustainable recovery in the U.K.

As the region is expected to face above-target inflation over the policy horizon, we should see the majority of the BoE support a neutral policy stance throughout the remainder of the year, and ease bets for more quantitative easing should increase the appeal of the British Pound as the central bank appears to be slowly moving away from its easing cycle.

As the GBPUSD maintains the upward trending channel carried over from March, we should see the pair work its way back towards the 1.5400 figure, but we may see the sterling mark a fresh monthly high over the next 24-hours of trading should the 1Q GDP report for the U.K. dampen fears of a triple-dip recession.

U.S. Dollar: Demands for Durable Goods Contract More-Than-Expected

The greenback is struggling to hold its ground, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)falling back from a fresh yearly high of 10,586, and the reserve currency may continue to consolidate ahead of the advance 1Q GDP report as the economic docket highlights a weakening outlook for growth.

Indeed, orders for U.S. Durable Goods slipped 5.7% in March amid expectations for a 3.0% decline, while Non-Defense Capital Goods Orders excluding Aircrafts – a proxy for future business investments – advanced 0.2% versus forecasts for a 0.3% rise. As demands for large-ticket items falter, the data may highlight a further slowdown in private sector consumption, and we may see the FOMC retain its highlight accommodative policy stance throughout the first-half of 2013 in an effort to encourage a stronger recovery.

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--- Written by David Song, Currency Analyst

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