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Bearish Euro Pattern Remains Intact- Pound Eyes Former Support

David Song

Talking Points

  • Euro: Slovenia to Inject EUR 900M, Spain Unemployment Hits Record-High
  • British Pound: U.K. 1Q GDP Expands 0.3%, 38.2% Fib in Focus
  • U.S. Dollar: 1Q GDP on Tap- FOMC to Preserve Current Policy

Euro: Slovenia to Inject EUR 900M, Spain Unemployment Hits Record-High

The Euro climbed to 1.3081 as the European Central Bank (ECB) argued lower borrowing costs in Europe mainly benefits ‘countries relatively immune from market tensions,’ while Governing Council member Joerg Asmussen claimed that ‘the pass-through of rate cuts to the periphery would be limited’ as the transmission mechanism for monetary policy remain impaired.

Nevertheless, International Monetary Fund First Deputy Managing Director David Lipton warned that the euro-area may slip into stagflation as the economic downturn threatens price stability, and went onto say that the ECB has room to provide additional monetary support as the region remains mired in a recession.

As European policy makers maintain a reactionary approach in addressing the risks surrounding the region, Slovenia said it will need to inject at least EUR 900M into its banking system by the end of July, while unemployment in Spain climbed to a fresh record-high of 27.16% during the first three-months of the year as the region faces a deepening recession.

Nevertheless, as there’s growing speculation for an ECB rate cut, central bank President Mario Draghi may strike a highly dovish tone for monetary policy at the May 2 meeting, and the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the region struggles to return to growth.

As the EURUSD continues to hold below the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we should see the head-and-shoulders formation continue to pan out in May, and the pair remains poised to give back the rebound from earlier this month

British Pound: U.K. 1Q GDP Expands 0.3%, 38.2% Fib in Focus

The British Pound surged to a fresh monthly high of 1.5478 as the advance GDP report showed the U.K. growing 0.3% in the first quarter amid forecasts for a 0.1% print, and the sterling should continue to retrace the decline from earlier this year as the region emerges from the double-dip recession.

In turn, we should see the Bank of England (BoE) preserve its current policy stance at the next interest rate decision on May 9, and we may see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy as the rebound in growth heightens the outlook for inflation.

Indeed, BoE Governor Mervyn King argued ‘monetary policy is pushing on a string’ as the central bank continues to embark on its non-standard measures, and it seems as though the Monetary Policy Committee is slowly moving away from its easing cycle as the outlook for growth and inflation improves.

As the upward trending channel in the GBPUSD continues to take shape, the pair looks poised for a move back towards former support – the 38.2% Fib 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 market participants scale back bets for more quantitative easing.

U.S. Dollar: 1Q GDP on Tap- FOMC to Preserve Current Policy

The greenback continued to lose ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 10,494, but we may see the reserve currency consolidate over the next 24-hours of trading as recovery in the world’s largest economy gathers pace.

As the advance 1Q GDP report is expected to show the U.S. expanding at a faster pace, a marked pickup in the growth rate should increase the appeal of the greenback, and the reserve currency may regain its footing ahead of the FOMC meeting on May 1 as a growing number of Fed officials appear to be scaling back their willingness to expand the balance sheet further.

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--- 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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