Euro Rebound to Fizzle- EU Calls for More ECB Support

DailyFX

Talking Points

  • Euro: German Factory Orders Top Forecast, More ECB Support Ahead
  • British Pound: Continues to Consolidate Ahead of BoE Rate Decision
  • U.S. Dollar: Extends Advance- Consumer Credit on Tap

Euro: German Factory Orders Top Forecast, More ECB Support Ahead

The Euro advanced to a high of 1.3130 as German Factory Orders unexpectedly increased another 2.2% March, while there’s reports Portugal will auction 10-year bonds for the first time since the 2011 bailout amid easing finance costs in Europe.

However, it seems as though the governments operating under the single currency are becoming increasingly reliant on monetary support as Spanish Prime Minister Mariano Rajoy calls upon the European Central Bank (ECB) to introduce additional programs to help finance small businesses, while Euro Group President Jeroen Dijsselbloem said the region needs tools to recapitalize commercial banks as the ECB plans to conduct asset-quality review of financial institutions.

As ECB President Mario Draghi stands ready to shore up the ailing economy, we should see the Governing Council continue to embark on its easing cycle over the coming months, and the central bank may show a greater willingness to implement negative interest rates in the euro-area as the region struggles to return to growth. In turn, the ECB monthly report due out Thursday may fuel speculation for additional monetary support, and the EURUSD remains poised to face additional headwinds over the near to medium-term as the outlook for growth and inflation remains weak.

Indeed, the EURUSD may continue to carve a lower top in May as it struggles to close back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, and we may see the pair give back the rebound from April (1.2743) as European policy makers maintain a reactionary approach in address the ongoing turmoil in the periphery countries.

British Pound: Continues to Consolidate Ahead of BoE Rate Decision

The British Pound continued to consolidate ahead of the Bank of England (BoE) interest rate decision, with the GBPUSD slipping to a low of 1.5520, but we should see the sterling maintain the upward trend dating back to March as the central bank appears to be slowly moving away from its easing cycle.

Although the BoE is widely expected to stick to its current policy, we may see the Monetary Policy Committee refrain from releasing a policy statement once again, but the meeting minutes due out on May 22 may continue to dampen expectations for more quantitative easing as the central bank sees a slow but sustainable recovery in the U.K.

Nevertheless, as we have the BoE Inflation Report scheduled for May 15, the quarterly release may take some steam out of the policy statement, but the fresh batch of central bank rhetoric may fuel a short-term rally in the British Pound as the BoE adopts a more neutral tone for monetary policy.

In turn, we may see the GBPUSD retain the range-bound price action carried over from the previous week, but the pair should continue to retrace the decline from earlier this year as the bullish trend continues to take shape.

U.S. Dollar: Extends Advance- Consumer Credit on Tap

The greenback tracked higher on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to 10,530, and the reserve currency may appreciate further during the North American trade as the fundamental outlook for the world’s largest economy improves.

Indeed, Consumer Credit is expected to expand another $16B in March amid the resilience in private consumption, and the pickup in economic activity should increase the appeal of the USD as it limits the Fed’s scope to expand the balance sheet further.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

IBD/TIPP Economic Optimism (MAY)

47.3

46.2

USD

19:00

15:00

Consumer Credit (MAR)

$16.000B

$18.139B

GBP

23:01

19:01

BRC Sales Like-For-Like YoY (APR)

1.9%

1.9%

--- 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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