Euro Remains Capped Despite ECB Hopes, Sterling to Face 1Q GDP

DailyFX

Talking Points

  • Euro: ECB to Weigh ‘New Options,’ Banks to Repay EUR 10.9B
  • British Pound: Lending to U.K. Firms Fall GBP 2.8B, 1Q GDP in Focus
  • U.S. Dollar: G20 Meeting Goes Unnoticed, 1Q GDP to Grow 3.0%

Euro: ECB to Weigh ‘New Options,’ Banks to Repay EUR 10.9B

The Euro advanced to an overnight high of 1.3116 amid speculation that the European Central Bank (ECB) will take additional steps to support the monetary union, but the single currency remains poised to face additional headwinds over the near to medium-term as the region remains mired in recession.

There are reports that the ECB is planning to incentivize commercial banks in Spain to increase lending to small and mid-sized firms, while Governing Council member Erkki Liikanen said the central bank is ‘prepared to look at new options’ as the governments operating under the monetary union struggle to get their house in order.

Indeed, Mr. Liikanen said ‘central banks can buy corporate bonds’ as the ECB continues to embark on its easing cycle, and went onto say that the board will retain an accommodative policy as the economic downturn in Europe threatens the prospects for price stability. As commercial banks in the euro-area plan to repay EUR 10.9B of the Long-Term Refinancing Operation next week, the weakening outlook for private sector lending may encourage the ECB to push the benchmark interest rate to a fresh record-low, and it seems as though the Governing Council will embark on its easing cycle throughout 2013 as the outlook for growth and inflation remains weak.

As the EURUSD makes another failed attempt to push back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we may see a head-and-shoulders top continue to take shape ahead of the next ECB rate decision on May 2, and the pair may give back the rebound from earlier this month as European officials maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: Lending to U.K. Firms Fall GBP 2.8B, 1Q GDP in Focus

The British Pound continued to pare the decline from earlier this month, with the GBPUSD climbing to a high of 1.5366, and the sterling may track higher in the week ahead as the advanced GDP report for the U.K. is expected to show the economy returning to growth in the first quarter.

Nevertheless, a report by the Bank of England (BoE) showed net lending to companies slipped GBP 2.8B in February, and it seems as though the Monetary Policy Committee will extend the Funding for Lending Scheme rather than embark on more quantitative easing as the majority scales back its willingness to expand the balance sheet further.

As the BoE sticks to the sidelines, we may see the upward trending channel in the GBPUSD continue to pan out in the week ahead, but the 1.5400 figure may continue to hold up as resistance should the developments coming out of the U.K. disappoint.

U.S. Dollar: G20 Meeting Goes Unnoticed, 1Q GDP to Grow 3.0%

The greenback pared the decline from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)advancing to a high of 10,529, and the reserve currency may continue to benefit from the flight to safety as headlines coming out of the G20 meeting fails to prop up investor confidence.

As the economic docket remains flight light for the remainder of the week, risk trends are likely to dictate price action throughout the North American trade, and the bullish sentiment surrounding the greenback may gather pace ahead of the next FOMC meeting on May 1 as the U.S. economy is expected to grow an annualized 3.0% in the first-quarter of 2013. As a growing number of central bank officials show a greater willingness to scale back on QE, a positive GDP print should continue to dampen the outlook for more easing, and the USDOLLAR looks poised for a bullish breakout amid the shift in the policy outlook.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

16:00

12:00

Fed's Stein Speaks on Credit Markets in Charlotte

EUR

17:30

13:30

ECB's Erkki Liikanen Speaks at Sifma in New York on EU Banks

--- 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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