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Euro Outlook Weighed By ECB Policy- ABS Purchases on Horizon?

David Song

Talking Points

  • Euro: German Industrial Outputs Increase- ECB to Look at ABS Purchases
  • British Pound: Eyes 38.2% Fib as BoE Poised to Maintain Current Policy
  • U.S. Dollar: To Consolidate on Light Economic Calendar

Euro: German Industrial Outputs Increase- ECB to Look at ABS Purchases

The Euro climbed to 1.3146 as Industrial Production in Germany unexpectedly increased another 1.2% during the month of March, but the single currency may continue to carve a lower top in May as the European Central Bank (ECB) looks to further embark on its easing cycle in 2013.

Although Cyprus is expected to receive the first tranche of the EUR 10.0B bailout in mid-May, EU Economic and Monetary Affairs Commissioner Olli Rehnsaid ‘Slovenia has excessive macroeconomic imbalances both as regards problems in its banking sector and in its public finances,’ and we may see the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support as they struggle to get their house in order.

As the euro-area remains mired in recession, ECB board member Joerg Asmussen floated the idea of purchasing asset-backed securities to encourage lending to small and medium-sized firms, and went onto say that the Governing Council stands ready to act again as the fundamental outlook for the euro-area remains clouded with high uncertainty.

As the EURUSD persistently fails to close above 1.3120 – the 38.2% Fibonacci retracement from the 2009 high to the 2010 low – the pair may continue to carve a lower top below the 1.3300 pivot, and the single currency remains poised to face additional headwinds over the near to medium-term as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: Eyes 38.2% Fib as BoE Poised to Maintain Current Policy

The British Pound appears to be regaining its footing ahead of the Bank of England (BoE) interest rate decision, with the GBPUSD advancing to 1.5515, and the sterling may track higher over the remainder of the week as market participants scale back bets for more quantitative easing.

Although we anticipate the BoE to refrain from releasing a policy statement, the neutral policy stance held by the Monetary Policy Committee should help to prop up the sterling, and we may see the central bank slowly move away from its easing cycle over the coming months as the U.K. skirts a triple-dip recession. As the region is expected to face above-target inflation over the next three-years, the BoE Minutes due out on May 22 may further dampen speculation for additional monetary support, and the central bank may start to lay out a tentative exit strategy towards the end of the year as the central bank continues to operate under its dual mandate to ensure price stability while fostering full-employment.

In turn, we should see the upward trending channel in the GBPUSD continue to take shape, and the pair may make a run at 38.2% Fibonacci retracement from the 2009 low to high around 1.5680 amid the shift in the policy outlook.

U.S. Dollar: To Consolidate on Light Economic Calendar

The greenback is struggling to hold its ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tumbling to a low of 10,498, and the reserve currency may continue to consolidate throughout the North American trade as the economic docket remains fairly light for the remainder of the day.

In turn, we may see the USDOLLAR continue to pare the rebound from earlier this month, but the bullish sentiment surrounding the greenback should gather pace in the days ahead as the economic docket is expected to show an improved outlook for the U.S. economy.

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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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