Euro Struggles Amid Deepening Recession- ECB to Buy More Time

Talking Points

• Euro: Retail Sales Weakens Further, ECB Can Only Buy Time

• British Pound: BoE to Maintain Current Policy, 38.2% Fib in Sight

• U.S. Dollar: Index Back Above 10,500- ECB Rhetoric on Tap

Euro: Retail Sales Weakens Further, ECB Can Only Buy Time

The Euro pared the overnight advance to 1.3139 as service-based activity in Europe contracted for the fifteenth month in April, while retail spending contracted another 0.1% in March after falling a revised 0.2% the month prior.

As the EU warns of a deepening recession in the euro-area, European Central Bank board member Benoit Coeure said the Governing Council will reduce the benchmark interest rate ‘again if indicators confirm the situation is deteriorating,’ and went onto say that the region needs ‘a strategy for returning to growth’ as the governments operating under the single currency become increasingly reliant on monetary support.

However, as European officials scale back their push for austerity, German Finance Minister Wolfgang Schaeuble warned the unprecedented measures taken by the ECB can ‘only buy time,’ and we may see a growing rift within the monetary union as the periphery countries struggling to get their house in order.

Nevertheless, it seems as though negative interest rates will be a growing discussion at the ECB as the economic downturn threatens price stability, and we anticipate the Governing Council to carry out its easing cycle throughout 2013 as the fundamental outlook for the region continues to deteriorate.

As the EURUSD struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, the near-term correction in the exchange rate could be nearing an end, and negative headlines coming out of the euro-area may continue to dampen the appeal of the single currency as European officials maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: BoE to Maintain Current Policy, 38.2% Fib in Sight

The British Pound lost ground on Monday, with the GBPUSD tagging a low of 1.5548, but we may see the GBPUSD hold steady ahead of the Bank of England (BoE) interest rate decision as the central bank is widely expected to preserve its wait-and-see approach this month.

Indeed, the BoE remains poised to keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and we may see another 6-3 split within the Monetary Policy Committee as the U.K. is expected to face above-target inflation over the policy horizon. At the same time, the majority may present a greater case to retain a neutral policy stance in the coming months, and we may see a growing number of BoE officials start to discuss an exit strategy in the second-half of the year as the Funding for Lending Scheme continues to work its way through the real economy.

As the GBPUSD maintains the upward trending channel dating back to March, the pair may continue to work its way towards the 38.2% retracement from the 2009 low to high around 1.5680, and the bullish sentiment surrounding the sterling may gather pace over the near to medium-term as the BoE appears to be slowly moving away from its easing cycle.

U.S. Dollar: Index Back Above 10,500- ECB Rhetoric on Tap

The greenback extended the rebound from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)climbing to a high of 10,508, and the greenback may continue to track higher during the North American trade should we see the flight the safety gather pace.

Although the economic docket remains fairly light over the next 24-hours of trading, ECB President Mario Draghi is scheduled to speak at 9:00 ET, and the fresh batch of central bank rhetoric may increase the appeal of the USD amid the deviation in the policy outlook.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
CAD	14:30	10:30	Ivey Purchasing Managers Index s.a. (APR)	58.0	61.6
NZD	22:00	18:00	ANZ Truckometer Heavy Traffic (APR)		-2.7%
NZD	22:45	18:45	Average Hourly Earnings (QoQ) (1Q)	1.0%	-0.4%
NZD	22:45	18:45	Private Wages Exc Overtime (QoQ) (1Q)	0.5%	0.5%
NZD	22:45	18:45	Private Wages Inc Overtime (QoQ) (1Q)	0.5%	0.6%

--- 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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