Euro Remains at Risk amid Growth Concerns, Slower Austerity

DailyFX

Talking Points

  • Euro: EU Cuts GDP Forecast- Slower Austerity amid Deepening Recession
  • British Pound: Back Above 50.0% Fib, BoE Miles Calls For More QE
  • U.S. Dollar: Correction Underway- Fed Rhetoric on Tap

Euro: EU Cuts GDP Forecast- Slower Austerity amid Deepening Recession

The Euro slipped to a fresh monthly low of 1.3155 as the European Commission lowered its fundamental assessment for the region and sees the economy contracting 0.3% this year amid an initial forecast for a 0.1% rise in GDP.

Indeed, the group warned that the ongoing weakness in the labor market ‘has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward,’ while EU Economic and Monetary Affairs Commissioner Olli Rehn showed a greater willingness to provide the periphery countries with more time in meeting their budget target as the outlook for growth and inflation deteriorates.

Although a Bloomberg News survey was calling for a EUR 125B repayment, the European Central Bank (ECB) commercials banks will return EUR 61.1B of the funds that were drawn out from LTRO 2, and the fundamental developments coming out of the region may continue to disappoint in 2013 as European policy makers maintain a reactionary approach in addressing the debt crisis.

As the governments operating under the single currency become increasingly reliant on monetary support, we should see the ECB push the benchmark interest rate to a fresh record-low in the coming months, and the EURUSD remains at risk for further losses as it fails to maintain the upward trend carried over from the previous year. As the pair comes up against the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, the key figure may provide interim support, but we will maintain a bearish outlook for the euro-dollar as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: Climbs Back Above 50.0% Fib, BoE Miles Calls For More QE

The British Pound extended the rebound from earlier this week, with the GBPUSD advancing to an overnight high of 1.5320, and the short-term rebound may gather pace in the days ahead as the relative strength index bounces back from oversold territory.

Nevertheless, Bank of England (BoE) board member David Miles continued to strike a dovish tone for monetary policy and said ‘a good case can be made for more expansion,’ but we may see the majority of the Monetary Policy Committee continue to endorse a neutral policy stance over the coming months as they see a sustainable recovery in the U.K.

As the GBPUSD trades back above the 50.0% Fib from the 2009 low to high around 1.5260, the short-term rebound should turn into a larger correction, but we may see the sterling face additional headwinds in the days ahead should the economic docket continue to dampen the outlook for growth.

U.S. Dollar: Correction Underway- Fed Rhetoric on Tap

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 10,371, and the reserve currency may continue to consolidate over the near-term as it remains overbought.

However, as we have more Fed officials on the wires later today, talks of scaling back QE3 may prop up the dollar during the North American trade, and we will maintain a bullish outlook over the near to medium-term amid the shift in the policy outlook.

As we’re expecting to see a larger correction in the USDOLLAR, we will use the short-term pullback as a buying opportunity, and we should see the bullish trend continue to take shape over the coming months as the U.S. economy gets on a more sustainable path.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:15

10:15

Fed's Powell, Rosengren Speak in New York

USD

23:30

18:30

Fed's Tarullo Speaks on Regulation in New York

--- 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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