Euro Pessimism Gathers Pace- Further ECB Support Ahead

DailyFX

Talking Points

  • Euro: Cyprus Not a Template, Banks to Become Increasingly Reliant on ECB
  • British Pound: 4Q GDP Contracts 0.3%, Disposable Incomes Fall 0.1%

Euro: Cyprus Not a Template, Banks to Become Increasingly Reliant on ECB

The Euro tumbled to a fresh yearly low of 1.2760 as economic confidence in Europe weakened more-than-expected during the month of March, and the single currency may face additional headwinds over the near to medium-term as fears of a deepening recession along with the renewed threat for contagion drags on the exchange rate.

Although the EU argued that the Cyprus bailout ‘is not a template’ for the euro-area, former Bundesbank President Axel Weber warned the ‘impact on the Cypriot economy is going to be huge,’ and argued that ‘banks will become even more dependent on ECB liquidity because deposits will be largely drained.’

At the same time, it seems as though Slovenia could be next in line to request external assistance as Prime Minister Alenka Bratusek warns that public finances in the region remain in ‘bad shape,’ and the renewed threat for contagion may continue to dampen the appeal of the single currency as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

As the fundamental outlook for Europe turns increasingly bleak, the EURUSD should continue to work its way towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 to test for near-term support, but the bearish sentiment surrounding the single currency may threaten the rebound from 2012 (1.2041) as market participants see a growing case for the ECB to push the benchmark interest rate to a fresh record-low in the coming months.

British Pound: 4Q GDP Contracts 0.3%, Disposable Incomes Fall 0.1%

The British continued to give back the rebound from earlier this month as the Bank of England (BoE) warned commercial banks in the U.K. will need to come up with GBP 25B in fresh capital by the end of the year in order to insulate the economy from future shocks.

At the same time, the final 4Q GDP report confirmed the 0.3% decline in the growth rate, but showed a 0.1% contraction in disposable incomes, which puts the BoE in an even tougher position as above-target inflation continues to sap purchasing power for Britons.

As the British economy struggles to emerge from the double-dip recession, we should see the Monetary Policy Committee maintain an accommodative policy stance in 2013, but we may see a growing number of BoE officials adopt a more neutral to hawkish tone for monetary policy as the central bank sees a slow but sustainable recovery ahead.

As the GBPUSD appears to have carved out a near-term top around the 50.0% Fib from the 2009 low to high around 1.5260, the pair looks poised to revert back towards the 61.8% retracement (1.4840-50), and we may see the pair continue to consolidate ahead of the next BoE meeting on April 4 as market participants weigh the outlook for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

12:30

8:30

Consumer Price Index (MoM) (FEB)

0.7%

0.1%

CAD

12:30

8:30

Consumer Price Index (YoY) (FEB)

0.8%

0.5%

CAD

12:30

8:30

Bank Canada Consumer Price Index Core (MoM) (FEB)

0.3%

0.1%

CAD

12:30

8:30

Bank Canada Consumer Price Index Core (YoY) (FEB)

0.9%

1.0%

CAD

12:30

8:30

Consumer Price Index s.a. (MoM) (FEB)

-0.1%

CAD

12:30

8:30

Consumer Price Index Core s.a. (MoM) (FEB)

0.1%

CAD

12:30

8:30

Consumer Price Index (FEB)

121.3

USD

14:00

10:00

Pending Home Sales (MoM) (FEB)

0.7%

4.5%

USD

14:00

10:00

Pending Home Sales (YoY) (FEB)

10.4%

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (MAR 22)

-1314K

USD

14:30

10:30

DOE U.S. Distillate Inventory (MAR 22)

-672K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (MAR 22)

-1476K

USD

15:30

11:30

Fed's Eric Rosengren Speaks on U.S. Economy

USD

17:00

13:00

Fed's Narayana Kocherlakota Speaks on Monetary Policy

NZD

21:45

17:45

Building Permits (MoM) (FEB)

3.0%

-0.4%

--- 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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