Forex: Euro Rebound Weighed By Growth Concerns- Pound at Key Juncture

DailyFX

Talking Points

  • U.S. Dollar: Consumer Confidence on Tap- 4Q GDP, FOMC in Focus
  • Euro: RSI Divergence Continues to Take Shape- Ifo, ECB Call For More Action
  • British Pound: Preserves Multi-Year Upward Trend, RSI Bounces Back

U.S. Dollar: Consumer Confidence on Tap- 4Q GDP, FOMC in Focus

The greenback tracked lower on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 10,163, and the reserve currency may continue to consolidate over the next 24-hours of trading as the U.S. economy is expected to expand at a slower pace during the last three-months of 2012.

Although we have the Conference Board’s Consumer Confidence survey on tap for later today, the dollar may continue to give back the advance from the previous week as the world’s largest economy is expected to grow 1.1% after expanding 3.1% during the third-quarter. Indeed, the slower rate of growth may trigger larger correction in the reserve currency, but the market reaction to the advance GDP report may be short-lived should the Federal Open Market Committee (FOMC) strike a more neutral tone for monetary policy.

Euro: RSI Divergence Continues to Take Shape- Ifo, ECB Call For More Action

The Euro continued to pare the rally from earlier this month, with the EURUSD slipping to a low of 1.3413, and the single currency remains poised to face additional headwinds over the near-term amid the heightening threat for a credit event in Cyprus.

As European policy makers struggle to meet on common ground, the president of Germany’s Ifo economic instituteHans-Werner Sinn warned that the periphery countries have not done enough to regain competitiveness, and it seems as though the European Central Bank (ECB) will continue embark on its easing cycle this year as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

Indeed, ECB board member Peter Praet argued that the central bank has necessary tools to keep ‘addressing the crisis in a decisive and effective way,’ but went onto say that monetary policy alone cannot fix debt crisis as the EU remains slow in implementing the necessary reforms to put public finances on a more sustainable path.

In turn, we still anticipate another rate cut from the Governing Council later this year, and the short-term rally in the EURUSD appears to have tapered off ahead of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as the relative strength index maintains the bearish trend carried over from the previous year. As a result, we are looking for a move back towards the 38.2% retracement (1.3120), but we may see another run to the upside should we see a slew of dismal developments coming out of the U.S.

British Pound: Preserves Multi-Year Upward Trend, RSI Bounces Back

The British Pound appears to have regained its footing as it maintains the upward trend from the 2009 lows, and the short-term rebound may turn into a larger correction as the relative strength index bounces back from oversold territory.

As the GBPUSD manages to put in a close above the 38.2% Fib from the 2009 low to high around 1.5680, we may see the bullish trend continue to take shape in the days ahead, and the sterling may track higher over the next 24-hours of trading as we’re expecting to see a 0.2B expansion in Net Consumer Credit along with a sixth consecutive rise in U.K. Mortgage Approvals.

Although the Bank of England (BoE) Minutes struck a more neutral tone this time around, we should see the Monetary Policy Committee target the risk for inflation as the economic recovery slowly gathers pace, and the shift in central bank rhetoric should prop up the pound throughout 2013 as the BoE sees above-target price growth over the policy horizon.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Consumer Confidence (JAN)

64.0

65.1

NZD

21:45

16:45

Building Permits (MoM) (DEC)

6.0%

-5.4%

--- 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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