Euro Hopes to Fizzle, Pound Rebound to Accelerate on BoE

DailyFX

Talking Points

  • Euro: ECB Pledges to Provide Liquidity- Cyprus in Talks With Russia
  • British Pound: BoE Votes 6-3, Osborne Supports Inflation-Targeting Framework
  • U.S. Dollar: FOMC to Maintain Policy- More Hawkish Tone on Tap

Euro: ECB Pledges to Provide Liquidity- Cyprus in Talks With Russia

The Euro climbed to 1.2955 as the European Central Bank (ECB) said it will provide liquidity to Cyprus ‘within the existing rules,’ but the renewed threat of contagion may continue to drag on the exchange rate as the EU maintains a reactionary approach in addressing the debt crisis.

Once again, former ECB member Lorenzo Bini Smaghiwarned of the ‘psychological contagion’ that Cyprus may have on the euro-area, and argued that there’s a sense of complacency as the EU pushes the periphery country to come up with an alternative proposal after the parliament voted against the levy on commercial bank deposits.

As Cyprus struggles to secure the EUR 10.0B bailout, there’s reports that the government is in talks with Russia to seek external assistance, but the headlines coming out of the euro-area may continue to drag on trader sentiment as the EU looks to keep commercial banks in Cyprus closed for the rest of the week.

In response to the ECB’s pledge, board member Joerg Asmussen said the central bank will ‘only provide emergency liquidity to solvent banks,' but the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the governments operating under the single currency struggle to get their house in order.

In turn, we should see the EURUSD persistently give back the rebound from back in November (1.2659), and will continue to look for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: BoE Votes 6-3, Osborne Supports Inflation-Targeting Framework

The British Pound rallied to 1.5157 as the Bank of England (BoE) Minutes showed another 6-3 split within the Monetary Policy Committee, but we’re seeing the sterling struggling to hold its ground as Chancellor of the Exchequer George Osborne warned of a protracted recovery in the U.K.

Indeed, the BoE sounded more hawkish this time around as the central bank warned that the depreciation in the British Pound may dampen the MPC’s credibility on inflation, and it seems as though the majority is slowly moving away from the easing cycle as the committee sees above-target inflation over the next three-years. At the same time, the BoE warned that more quantitative easing may trigger an ‘unwarranted’ drop in the exchange rate, and it seems as though the central bank will stick to the sidelines throughout the remainder of the year as they anticipate a slow but sustainable recovery in Britain.

In contrast, Chancellor Osborne said the BoE’s asset purchase program will remain in place for years to come as the government now sees the U.K. expanding 0.6% in 2013 versus an initial forecast for a 1.2% rise, but supported the central bank’s inflation-targeting framework while delivering the 2013 budget statement.

Nevertheless, the more hawkish tone set by the central bank should sap the bearish sentiment surrounding the sterling, and the GBPUSD looks poised to test the 50.0% Fib from the 2009 low to high (1.5260) as the central bank talks down speculation for more quantitative easing.

U.S. Dollar: FOMC to Maintain Policy- More Hawkish Tone on Tap

The greenback is struggling to hold its ground ahead of the FOMC interest rate decision, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a high of 10,514, but the recent weakness in the reserve currency is likely to be short-lived as the Fed turns increasingly upbeat on the economy.

Although the FOMC is widely expected to maintain its current policy in March, the central bank may strike a more hawkish tone this time around as the economic recovery gradually gathers pace. In turn, we may see a growing number of Fed officials scale back their willingness to expand the balance sheet further, and we may see the committee start to discuss a tentative exit strategy as the world’s largest economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAR 15)

2624K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAR 15)

83K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAR 15)

-3571K

EUR

15:00

11:00

Euro-Zone Consumer Confidence (MAR A)

-23.2

-23.6

USD

18:00

14:00

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

USD

18:00

14:00

Fed Releases Summary of Economic Projections

USD

18:30

14:30

Fed Chairman Ben Bernanke Holds Press Conference

NZD

21:45

17:45

Gross Domestic Product (QoQ) (4Q)

0.9%

0.2%

NZD

21:45

17:45

Gross Domestic Product (YoY) (4Q)

2.3%

2.0%

--- 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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