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Euro Falls on Deepening Recession, Renewed Risk for Contagion

David Song

Talking Points

  • Euro: ECB Sets ELA Deadline- Cyprus to Create ‘Investment Solidarity Fund’
  • British Pound: U.K. Retail Sales Tops Forecast, 50.0% Fib in Sight
  • U.S. Dollar: Philadelphia Fed Survey, Existing Home Sales on Tap

Euro: ECB Sets ELA Deadline- Cyprus to Create ‘Investment Solidarity Fund’

The Euro weakened to 1.2878 as manufacturing and service-based activity in Europe contracted at a faster pace in March, while the European Central Bank (ECB) warned it would ‘maintain the current level of Emergency Liquidity Assistance, ELA, until Monday, 25 March 2013’ for Cyprus as the region struggles to secure a bailout.

As the Cypriot parliament votes against the levy on commercial bank deposits, the government now plans to draw up an ‘investment solidarity fund’ to recapitalize the banking sector, and is also seeking a EUR 5B loan from Russia as the EU maintains a reactionary approach in addressing the ongoing turmoil surrounding the region.

As European policy makers struggle to stem the renewed threat for contagion, the weakening outlook for the region should continue to drag on the exchange rate, and we may see the ECB come under pressure to ease policy further as the governments operating under the single currency become increasingly reliant on monetary support.

As the fundamental developments coming out of the euro-area point to a deepening recession, we should see the central bank push the benchmark interest rate to a fresh record-low, and the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the economic downturn threatens price stability.

Indeed, the negative headlines coming out the euro-area casts a bearish outlook for the EURUSD, but we need a close below to the 200-Day SMA (1.2867) to see a more meaningful move towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50.

British Pound: U.K. Retail Sales Tops Forecast, 50.0% Fib in Sight

The British Pound climbed to a fresh monthly of 1.5208 as retail spending in the U.K. jumped 1.9% in February to mark the biggest advance since April 2011, while public sector net borrowing increased GBP 4.4B during the same period amid forecasts for a GBP 8.2B rise.

As the fundamental developments coming out of the U.K. encourage an improved outlook for growth and inflation, we should see the sterling may continue to retrace the sharp decline from the previous month, and the rebound from 1.4830 looks poised to gather pace over the near to medium-term as the Bank of England (BoE) appears to be slowly moving away from its easing cycle.

In turn, we are still looking for a run at the 50.0% Fib from the 2009 low to high around 1.5260, but the fundamental developments coming out of the U.K. may produce a more meaningful rally in the GBPUSD as the central bank continues to see a slow but sustainable recovery ahead.

U.S. Dollar: Philadelphia Fed Survey, Existing Home Sales on Tap

The greenback is paring the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,463, but we may see the reserve currency regain its footing during the North American trade as the economic docket is expected to instill an improved outlook for the world’s largest economy.

Indeed, U.S. Existing Home Sales are expected to increase another 1.6% in February after expanding 0.4% the month prior, while the Philadelphia Fed Business survey may strike an improved outlook for growth as the gauge is projected to increase to -3.0 from -12.5. The pickup in housing along with a rebound in business sentiment may prop up the dollar as it highlights a more broad-based recovery in the world’s largest economy, and we should see the Federal Reserve adopt a more neutral to hawkish tone over the coming months as the outlook for growth and inflation improves.

FX Upcoming










House Price Index (MoM) (JAN)






Philadelphia Fed. (MAR)






Existing Home Sales (FEB)






Existing Home Sales (MoM) (FEB)






Leading Indicators (FEB)






ANZ NZ Job Ads (MoM) (FEB)





Net Migration s.a. (FEB)


--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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