Euro at Risk of Deeper Losses on Sidelined ECB, Fading Risk Appetite

DailyFX   |  April 4 2012 2:50 EDT

The Euro is at risk of sinking further as a sidelined ECB fails to offer support amid recession while risk appetite continues to unravel across financial markets.

Talking Points

• Euro May Decline as Rate Cut Outlook Builds on Soft Data, Sidelined ECB
• US Dollar, Yen Aim Higher as Stock Index Futures Point to Risk Aversion
• Australian Dollar Underperforms on Fading QE3 Hopes, Dovish RBA Bets

The European Central Bankinterest rate decision headlines the calendar. Policymakers are expected to keep the benchmark interest rate unchanged at 1 percent and appear unlikely to offer any new non-standard measures as inflation readings remain uncomfortably elevated (2.6 percent year-on-year in March).

Rather, ECB President Mario Draghi is likely to stress recent progress on the debt crisis front at the press conference following the announcement. The central certainly deserves credit – its 3-year LTRO operations proved to be the most potent remedy yet to sovereign risk pressure – but there is little here that could materially surprise investors and thereby generate fireworks from price action.

On the economic data front, the final revision of the Eurozone Composite PMI gauge is forecast to confirm that manufacturing- and service-sector activity contracted for the seventh consecutive month in March. German Factory Orders are expected to rise in February while region-wide Retail Sales pull back a bit, but the 3- and 6-month trend in both indicators points definitively lower.

Taken against a backdrop of a sidelined ECB, the data set may prove to weigh on the Euro as traders reckon that withholding stimulus now may translate into more aggressive easing down the road as recession deepens. Spain is in focus on the issuance docket with Madrid scheduled to sell a tranche of 2015, 2016 and 2020 bonds.

Sizing up sentiment trends, stock index futures tracking key European and US stock indexes are pointing uniformly lower, hinting risk appetite is likely to remain on the defensive to the detriment of equities-linked currencies. The US ADP Employment reading as well as the ISM Non-manufacturingComposite measure are on tap late into the session, with moderation expected on both fronts and aiming to compound the defensive tone across global exchanges.

The US Dollar and Japanese Yen outperformed in overnight trade, buoyed by safe-haven demand after a relatively hawkish set of FOMC meeting minutes damped hopes that additional stimulus would accelerate demand in the world’s top economy and sank regional stocks. The MSCI Asia Pacific regional benchmark equity index fell 1.5 percent.

The Australian Dollar underperformed as headwinds from risk aversion were compounded by an increasingly dovish monetary policy outlook following yesterday’s RBA interest rate decision. Markets now price an 86 percent probability of a 25bps rate cut at the central bank’s May meeting and 80bps in easing over the coming year, according to data from Credit Suisse.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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