Euro Outlook Hinges on ECB- Pound Snaps Back on BoE Policy

Talking Points

• Euro: S&P Raises Portugal Outlook- ECB Rate Decision in Focus

• British Pound: BoE Maintains Current Policy- Meeting Minutes on Horizon

• U.S. Dollar: Consumer Credit, Fed Stress Test on Tap

Euro: S&P Raises Portugal Outlook- ECB Rate Decision in Focus

The Euro rallied to 1.3043 ahead of the European Central Bank (ECB) meeting as Standard & Poor’s raised Portugal’s credit-rating outlook to ‘stable’ from ‘negative,’ while Spain sold EUR 5.03B in government bonds amid the EUR 5.00B target.

Although the ECB is widely expected to keep the benchmark interest rate at 1.00%, the policy statement accompanying the rate decision is likely to dampen the appeal of the single currency as we anticipate the central bank’s updated assessment to highlight a deepening recession in the euro-area. In turn, central bank President Mario Draghi may show a greater willingness to push the benchmark interest rate to a fresh record-low in order to steer the region out of recession, and we may see a growing number of central bank officials discuss a negative interest rate policy for the euro-area as the economic downturn threatens price stability.

At the same time, the Governing Council remains poised to push back its forecast of seeing the region return to growth as the EU lowers its fundamental outlook for Europe, and the fresh batch of central bank rhetoric may trigger a sharp selloff in the exchange rate should Mr. Draghi make another attempt to talk down the Euro.

As the fundamental outlook for Europe remains bleak, we will maintain our bearish outlook for the EURUSD, and will look for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the Governing Council remains poised to carry out its easing cycle throughout this year.

British Pound: BoE Maintains Current Policy- Meeting Minutes on Horizon

The British Pound snapped back from a fresh yearly low of 1.4963 as the Bank of England (BoE) stuck to its current policy in March, and the sterling may continue to consolidate over the near-term as market participants weigh the outlook for monetary policy.

Indeed, the BoE refrained from releasing a policy statement as the central bank kept the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and the meeting minutes due out on March 20 may show another 6-3 within the Monetary Policy Committee as the board anticipates a slow but sustainable recovery in the U.K. As inflation is expected to hold above the 2% target over the policy horizon, the majority may stick to the sidelines throughout 2013, and we may see a growing number of BoE officials adopt a more hawkish tone over the coming months as the Funding for Lending Scheme continues to work its way through the real economy.

As the relative strength index on the GBPUSD comes off of oversold territory, we should see the pair consolidate in the coming days, and we may see a more meaningful rebound in the week ahead should the data coming out of the U.K. heighten the threat for inflation.

U.S. Dollar: Consumer Credit, Fed Stress Test on Tap

The greenback pared the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) tagging a low of 10,483, but we may see the reserve currency regain its footing later today should the economic docket highlight an improved outlook for the U.S.

Although U.S. Consumer Credit is expected to expand another $14.5B in January, the Fed’s Stress Test may increase the appeal of the dollar should the results highlight an improved outlook for the banking sector, and we may see a growing number of Fed officials start to adopt a more neutral tone for monetary policy as the economic recovery gradually gathers pace.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	12:30	7:30	Challenger Job Cuts (YoY) (FEB)		-24.4%
EUR	12:45	7:45	European Central Bank Interest Rate Decision	0.75%	0.75%
EUR	12:45	7:45	European Central Bank Deposit Facility Rate	0.00%	0.00%
EUR	13:30	8:30	ECB President Mario Draghi Delivers Policy Statement
CAD	13:30	8:30	International Merchandise Trade (Canadian dollar) (JAN)	-0.55B	-0.90B
CAD	13:30	8:30	Building Permits (MoM) (JAN)	--	-11.2%
USD	13:30	8:30	Initial Jobless Claims (MAR 2)	355K	344K
USD	13:30	8:30	Continuing Claims (FEB 23)	3110K	3074K
USD	13:30	8:30	Trade Balance (JAN)	-$43.0B	-$38.5B
USD	13:30	8:30	Non-Farm Productivity (4Q F)	-1.5%	-2.0%
USD	13:30	8:30	Unit Labor Costs (4Q F)	4.3%	4.5%
USD	15:00	10:00	Fed's Jerome Powell Testifies on Bank Secrecy Act
USD	17:00	12:00	Household Change in Net Worth (4Q)		$1722B
USD	20:00	15:00	Consumer Credit (JAN)	$14.500B	$14.595B
USD	21:30	16:30	Fed Publishes Results of Supervisory Stress Test
NZD	21:45	16:45	Manufacturing Activity (4Q)		1.6%
NZD	21:45	16:45	Manufacturing Activity Volume s.a. (QoQ) (4Q)		2.6%

--- 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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