Euro to Falter on ECB Rate Cut- H&S Reversal to Take Shape

Talking Points

• Euro: Private Lending Contracts for 11 Months, ECB Rate Cut on Tap

• British Pound: Bullish Trend Continues to Take Shape, BoE to Maintain Policy

Euro: Private Lending Contracts for 11 Months, ECB Rate Cut on Tap

The Euro gave back the overnight advance to 1.3046 as the European Central Bank (ECB) continued to highlight a weakening outlook for the monetary union, and the single currency may come under increased pressure next week as market participants see the Governing Council pushing the benchmark interest rate to a fresh record-low at the May 2 meeting.

Indeed, the ECB warned small to medium-sized firms are facing ‘a deterioration in the availability of bank loans’ as private sector lending contracted for the 11th month in March, and went onto say that ‘the survey results suggest that financing conditions for SMEs continue to differ significantly across euro area countries’ as European policy makers maintain a reactionary approach in addressing the risks surrounding the region. As commercial banks plan to repay EUR 2.3B of the Long-Term Refinancing Operations next week, private lending is likely to deteriorate further over the coming months, and we may see the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support as the outlook for growth remains weak.

As the ECB takes unprecedented steps to save the monetary union, the Bundesbank argued that ‘even though monetary policy is having different effects within the euro area, it is questionable whether these differences constitute a malfunctioning to be addressed by monetary policy,’ but the Governing Council may have little choice but to embark on its easing cycle throughout 2013 in order to steer the region out of recession.

As the EURUSD continues to carve out a right shoulder around the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, a rate cut from the ECB may serve as the fundamental trigger to put the head-and-shoulders reversal pattern into play, and the pair looks poised to work its way back towards the 23.6% retracement around 1.2640-50 as it carves a lower top in April.

British Pound: Bullish Trend Continues to Take Shape, BoE to Maintain Policy

The British Pound continued to retrace the decline from earlier this year, with the GBPUSD advancing to a high of 1.5470, and the sterling may continue to track higher in May as market participants scale back bets for more quantitative easing.

As the U.K. emerges from the double-dip recession, we should see the Bank of England (BoE) preserve its current policy at the May 9 meeting, and we may see the central bank slowly move away from its easing cycle over the coming months as the central bank anticipates above-target inflation over the policy horizon.

As the upward trending channel in the GBPUSD continues to take shape, the British Pound looks poised to make a run towards the 38.2% Fib from the 2009 low to high around 1.5680,

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	12:30	8:30	Gross Domestic Product (Annualized) (1Q A)	3.0%	0.4%
USD	12:30	8:30	Personal Consumption (1Q A)	2.7%	1.8%
USD	12:30	8:30	Gross Domestic Product Price Index (1Q A)	1.4%	1.0%
USD	12:30	8:30	Core Personal Consumption Expenditure (QoQ) (1Q A)		1.0%
USD	13:55	9:55	U. of Michigan Confidence (APR F)	73.5	72.3

--- Written by David Song, Currency Analyst

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

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