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Euro H&S Top in Focus Ahead of ECB Meeting- More Easing on Tap

David Song

Talking Points

  • Euro: Unemployment Hits Record-High, Inflation Slows Further
  • British Pound: U.K. Mortgage Apps Top Forecast, BoE Curbs Inflation Outlook

Euro: Unemployment Hits Record-High, Inflation Slows Further

The Euro tumbled to 1.3052 as the jobless rate in the monetary union climbed to a fresh record-high of 12.1% in March, while the headline reading for inflation slipped to an annualized rate of 1.2% during the month of April to mark the slowest pace of growth since February 2010.

Moreover, unemployment in Germany increased another 4K in April after expanding a revised 12K the month prior, and we may see the European Central Bank (ECB) carry out its easing cycle throughout 2013 as the region struggles to return to growth.

As the economic downturn threatens price stability, there’s growing bets that ECB President Mario Draghi will deliver a rate cut at the May 2 meeting, but the Governing Council may have little choice but to introduce more non-standard measures over the coming months as the governments operating under the single currency scale back their push for austerity. Even if the ECB refrains from pushing the benchmark interest rate to a fresh record-low, the policy statement may instill a bearish outlook for the euro should the central bank strike a highly dovish tone for monetary policy.

Although the Cypriot parliament is expected to approve the EUR 10B bailout later today, the ongoing turmoil in the periphery countries should continue to dampen the appeal of the single currency, and the EURUSD may fail to maintain the rebound from earlier this month as the fundamental outlook for the euro-area turns increasingly bleak.

As the EURUSD remains capped by the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, the ECB rate decision may serve as the fundamental catalyst to put the head-and-shoulders reversal into motion, and the single currency remains poised to face additional headwinds over the near to medium-term as European officials retain a reactionary approach in addressing the risks surrounding the region.

British Pound: U.K. Mortgage Apps Top Forecast, BoE Curbs Inflation Outlook

The British Pound struggled to maintain the overnight advance to 1.5516 even as U.K. Mortgage Approvals increased an annualized 53.5K in March amid forecasts for a 52.7K print, and we may see the sterling continue to consolidate ahead of the next Bank of England (BoE) interest rate decision on May 9 as the central bank keeps the door open to expand the balance sheet further.

Indeed, BoE board member David Miles struck a rather dovish tone for monetary policy as he expects ‘inflation will be quite close to 2%’ target in the year ahead, while Chancellor of the Exchequer George Osborne set the first remit for the central bank’s Financial Policy Committee as the group takes on new responsibilities following the financial crisis.

In an official statement, Mr. Osborne said ‘the Financial Policy Committee is now charged with identifying, monitoring and addressing risks to the financial system as a whole,’ and went onto say that ‘it is particularly important at this stage of the cycle that the committee takes into account, and gives due weight to, the impact of its action on the near-term economic recovery’ as the region managed to avoid a triple-dip recession.

As the U.K. faces a slow but sustainable recovery, we should see the BoE stick to the sidelines for most of 2013, but the central bank may start to discuss a tentative exit strategy later this year amid the stickiness in inflation.

Indeed, we’re still bullish on the GBPUSD as it maintains the upward trending channel carried over from the previous year, but the pair looks poised for a near-term correction as it falls back from trendline resistance.

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Building Permits (MoM) (MAR)






GfK Consumer Confidence Survey (APR)



--- Written by David Song, Currency Analyst

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

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