DailyFX | February 24 2012 9:30 EST
The Euro extended the advance from earlier this week as the European Central Bank talked down speculation for additional monetary support, but bullish momentum underlining the single currency may taper off in the days ahead as the risk for contagion continues to bear down on investor confidence.
Euro: ECB Softens Dovish Tone, Second LTRO In Focus
The Euro advanced to a fresh yearly high of 1.3424 as the European Central Bank softened its dovish tone for monetary policy, but we may see the single currency come under pressure next week amid threats of a Greek default. Indeed, ECB board member Ewald Nowotny struck a neutral tone while speaking in Vienna and said that he does not ‘see any further need for action’ as the central bank prepares to launch its second three-year loan facility next week. However, the outcome may spook investors should demands well exceed the EUR 489B offered back in December.
At the same time, Governing Council Member Benoit Coeure argued against a zero-interest rate policy, stating that the ‘costs of an anticipated protracted low-rate policy - in terms of fueling risk taking, promoting an overhang of non- performing loans and prolonging future imbalances - can be significant,’ and it seems as though the ECB will maintain a wait-and-see approach for the remainder of the year as policy makers expect to see a gradual recovery later this year. However, concerns regarding the implementation of Greece’s second-bailout package may drag on market sentiment as Finland’s parliament said it will delay its vote to February 29, and heightening threats of a default may trigger sharp reversal in the EURUSD as market participants see Moody’s and Standard & Poor’s lowering their credit rating for the region. Although the euro-dollar remains on track to test the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, we may see a near-term correction next week as the relative strength index approaches oversold territory, but the outcome of the second LTRO is expected to have a major impact on the exchange rate as market participants weigh the prospects for future policy.
British Pound: Private Consumption Rebounds In 4Q, Stronger Recovery Ahead
The British Pound continue to recoup the losses from earlier this week, with the GBP/USD advancing to an overnight high of 1.5835, but we may see the exchange rate track sideways over the near-term as it remains capped by the 200-Day SMA at 1.5910. Although the preliminary 4Q GDP report reaffirmed a 0.2% contraction in the growth rate, but the rebound in private sector consumption paired with the improvement in net exports encourages an improved outlook for the region as the Bank of England anticipates to see a more robust recovery in 2012. In turn, we should see the BoE endorse a wait-and-see approach throughout the year, and easing bets for more quantitative easing should help to prop up the sterling as the fundamental outlook for the U.K. picks up. However, as the GBP/USD maintains the broad range from earlier this month, we will need to see a slew of positive developments next week to set the stage for a bullish breakout, and the sterling may have carved out a higher low in February as price action continues to hold above the 50-Day SMA (1.5627).
More to Follow...
--- Written by David Song, Currency Analyst
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