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Euro Optimism to Burst on Growth Fears- Key Resistance Ahead

David Song

Talking Points

  • Euro: Russia to Restructure Cyprus Loan, Portugal Pledges More Austerity
  • British Pound: U.K. Manufacturing, Industrial Production to Rebound
  • U.S. Dollar: Index Propped Up By Yen Weakness, Chairman Bernanke in Focus

Euro: Russia to Restructure Cyprus Loan, Portugal Pledges More Austerity

The Euro rallied to 1.3036 as Russia agreed to restructure the EUR 2.5B loan taken by Cyprus in 2011, while Portugal pledged to increase its push for austerity after the region’s Constitutional Court struck down plans to cuts payments to state workers and pensioners.

In turn, the European Union said the next bailout disbursement for Portugal is conditional on review, while EU President Herman Van Rompuyassured the group would take a ‘growth- friendly’ approach in addresses the risks surrounding the region as the periphery countries struggle to get their house in order.

As the euro-area struggles to emerge from the recession, the Sentix Investor Confidence survey tumbled to -17.3 in April to mark the lowest reading since December, and it seems as though we will see the European Central Bank (ECB) push the benchmark interest rate to a fresh record-low in the coming months as the governments operating under the single currency become increasingly reliant on monetary support.

As the EURUSD breaks out of the downward trending channel dating back to February, the rebound from 1.2743 may gather pace in the days ahead, but the rebound may taper off ahead of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the figure provides near-term resistance.

British Pound: U.K. Manufacturing, Industrial Production to Rebound

The British Pound is struggling to hold its ground on Monday, with the GBPUSD giving back the overnight advance to 1.5349, and the sterling may hold a narrow range ahead of the Bank of England (BoE) Minutes due out on April 17 as market participants weigh the outlook for monetary policy.

As the GBPUSD breaks out of the range-bound price action carried over from the previous month, the topside break instills a bullish outlook for the sterling, and we may see the pound-dollar continue to hold above former support – the 50.0% retracement from the 2009 low to high around 1.5260 – as manufacturing and industrial outputs are expected to pick up in the U.K.

As the economic recovery in Britain gradually gathers pace, we should see the majority of the Monetary Policy Committee continue to support a neutral policy stance for 2013, and the GBPUSD remains poised to retrace the sharp decline from earlier this year as the central bank scales back its willingness to further embark on quantitative easing.

U.S. Dollar: Index Propped Up By Yen Weakness, Chairman Bernanke in Focus

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbed to 10,504, led by the ongoing weakness in the Japanese Yen, but we may see the greenback consolidate during the North American trade as the economic docket remains fairly light for the next 24-hours of trading.

However, as Fed Chairman Ben Bernanke is scheduled to speak at the Atlanta Fed conference at 23:15 GMT, the fresh batch of central bank rhetoric may spark increased volatility later today, and the central bank head may strike a more upbeat tone for the world’s largest economy as the region gets on a more sustainable path. As the central bank anticipates a stronger recovery in 2013, it seems as though the FOMC will slowly move away from its easing cycle over the coming months, and we may see a growing number of Fed officials scale back their willingness to expand the balance sheet further as the outlook for growth and inflation improves.

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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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