DailyFX | April 30 2012 9:10 EDT
Market sentiment waned on Monday amid fears of prolonged recession in euro-area, and the shift away from risk taking behavior may gather pace in May as European policy maker struggle to address the sovereign debt crisis.
Euro: Spain Faces Double-Dip Recession, Descending Triangle Continues To Take Shape
The Euro slipped to 1.3207 as Spain contracted another 0.3% in the first-quarter of 2012, and the EURUSD should track lower going into May as the fundamental outlook for the region continues to deteriorate. At the same time, we saw the CPI Estimate slow to 2.6% in April from 2.7% the month prior, and the weakening outlook for growth and inflation may lead the European Central Bank to ease policy further as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.
According to Credit Suisse overnight index swaps, market participants are starting to price a rate cut over the next 12-months, and we may see the ECB President Mario Draghi target the benchmark interest rate in the second-half of the year as the non-standard measures have a limited impact in addressing the risks for the region. As the EURUSD continues to approach the apex of the descending triangle, we will preserve our bearish outlook for the pair, and we may see the euro-dollar continue to consolidate ahead of the ECB rate decision on tap for later this week as currency traders weigh the outlook for monetary policy. Should the Governing Council sound increasingly dovish this time around, speculation for more easing would spark a bearish reaction in the exchange rate, but we would need to see a break and a close below 1.3000 for a move back down to the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.
British Pound: Clears 23.6% Fib, RSI Bouncing Around 70
The British Pound fell back from a fresh yearly high of 1.6300 amid the shift in risk sentiment, but the sterling may continue to track higher in May as interest rate expectations gather pace. Indeed, there’s speculation that the Bank of England could be forced to do more as the U.K. faces a double-dip recession, but it seems as though the Monetary Policy Committee will continue to move away from its easing cycle as central bank officials anticipate to see a stronger recovery in the second-half of the year. As the BoE changes its tune, the less dovish tone held by the central bank should prop up the sterling throughout 2012, and the GBPUSD may continue to retrace the decline from last April as it clears the 23.6% Fib from the 2009 low to high around 1.6250.
More to Follow...
--- Written by David Song, Currency Analyst
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