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Euro Rallies on Stick Inflation, Pound to Benefit From BoE

David Song

Talking Points

  • Euro: Core Inflation Tops Forecast, German Investor Confidence Falters
  • British Pound: U.K. Core Inflation Ticks Higher

Euro: Core Inflation Tops Forecast, German Investor Confidence Falters

The EURUSD bounced back from an overnight low of 1.3026 as consumer prices in the euro-area grew an annualized 1.7% during the month of March, which was in-line with market expectations, while the core rate of inflation advanced 1.5% during the same period amid forecasts for a 1.4% print.

As sticky price growth dampens the European Central Bank’s (ECB) scope to push the benchmark interest rate to a fresh record-low, we’re seeing the euro-dollar threaten the range-bound price action carried over from the previous week, but the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the region remains mired in a recession.

As the German ZEW Investor Confidence survey weakens to 36.3 from 48.5 in March, the risk of a protracted recovery may encourage the ECB to adopt a more dovish tone for monetary policy, and we may see a growing number of central bank officials push for a rate cut as the weakening outlook for growth threatens the prospects for price stability.

Although Slovenia is looking towards state-owned lenders to help finance EUR 855M of bills, the persistent threat for contagion may continue to dampen the appeal of the single currency, and the euro may face additional headwinds over the near to medium-term as the governments operating under the monetary union continue to seek external assistance.

As the EURUSD climbs back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we’ll be waiting to see if the pair can put in close above the key figure, but the single currency may struggle to hold its ground ahead of the G20 meeting as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

British Pound: U.K. Core Inflation Ticks Higher

The British Pound retraced the decline carried over from the previous week as the headline reading for U.K. inflation grew an annualized 2.8% for the second month in March, while the core reading increased 2.4% during the same period amid forecasts for a 2.3% print.

As market participants turn their attention to the Bank of England (BoE) Minutes on tap for tomorrow, the policy statement is likely to show another 6-3 split within the Monetary Policy Committee, and the central bank may continue to promote a neutral stance as the board anticipates a slow but sustainable recovery in the U.K.

In turn, the British Pound should continue to retrace the decline from earlier this year, and we will look for fresh monthly highs in the GBPUSD as market participants scale back bets for more quantitative easing.

--- Written by David Song, Currency Analyst

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

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