DailyFX | March 15 2012 9:25 EDT
The Euro regained its footing on Thursday as the European Central Bank talked down speculation for lower borrowing costs, but we are likely to see the single currency face additional headwinds over the near-term as the sovereign debt crisis continues to drag on investor confidence.
Euro: ECB Highlights Sticky Prices, Portugal & Ireland May Need More Assistance
The EURUSD pared the overnight decline to 1.3003 as the European Central Bank’s monthly report highlighted the ‘upside risks’ for inflation, while board member Erkki Liikanen curbed bets for more monetary easing as he expects the Governing Council to unwind the non-standard measures in a ‘timely’ manner. Indeed, it seems as though the ECB will sit on the sidelines after completing the second Long Term Refinancing Operation, but the central bank may have little choice but to push the benchmark interest rate below 1.00% as the debt crisis continues to dampen the fundamental outlook for the euro-area.
Former ECB board member Lorenzo Bini Smaghi warned that Portugal and Ireland will need additional aid should the two countries fail to tap the bond market in 2013, and the heightening risk for contagion casts a bearish outlook for the EURUSD as European policy makers struggle to restore investor confidence. As the recent selloff in the euro-dollar fails to produce a test of the February low (1.2973), we may see the pair consolidate going into the end of the week, but the pair looks poised to give back the advance from earlier this year as the exchange rate continues to carve a head-and-shoulders top in March. In turn, we will maintain our bearish call for the EURUSD and we should see the pair continue to work its way towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the fundamental outlook for the euro-area remains bleak.
British Pound: BoE’s Broadbent Softens Dovish Tone Ahead Of Minutes
The British Pound bounced back from a low of 1.5633 to maintain the range from earlier this week, and the GBPUSD should track sideways going into the following week as market participants wait for the Bank of England Minutes due out on March 21. As the BoE reverts back to a wait-and-see approach, the fresh batch of commentary is likely to heavily influence the sterling over the near-term, and we may see the policy statement prop up the British Pound should the central bank soften its dovish tone for monetary policy. Indeed, BoE board member Ben Broadbent said that the recent efforts to address the sovereign debt crisis paired with the more robust recovery in the U.S. ‘could warrant a withdrawal of monetary accommodation,’ and saw a limited risk of undershooting the 2% target for inflation as central bank officials expect economic activity to gather pace in 2012. In turn, we may see the Monetary Policy Committee conclude its easing cycle in 2012, and the shift in the policy outlook should prop up the sterling as market participants scale back speculation for more quantitative easing.
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--- Written by David Song, Currency Analyst
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