Euro Weakens Ahead of ECB, EU Summit- Pound Carves Higher Low

DailyFX   |  February 4 2013 8:40 EST

The Euro lost ground on Monday and the single currency may continue to give back the advance from earlier this year should the European Central Bank (ECB) show a greater willingness to carry out its easing cycle in 2013.

Talking Points

• Euro: Rajoy Meets Merkel- ECB Rate Decision, EU Summit on Horizon
• British Pound: Maintains Bullish Trend, Ex-BoE’s Gieve Sees More Easing
• U.S. Dollar: Hits Fresh Monthly High- ISM New York, Factor Orders on Tap

Euro: Rajoy Meets Merkel- ECB Rate Decision, EU Summit on Horizon

The EURUSD slipped to a low of 1.3552 ahead of the European Central Bank (ECB) meeting and the EU Summit on tap for later this week, and the single currency may weaken further ahead of the major event risks on tap for later this week as European policy makers maintain a reactionary approach in addressing the debt crisis.

Indeed, Spanish Prime Minister Mariano Rajoy is scheduled to meet with German Chancellor Angela Merkel amid calls to resign from office, but the political uncertainties surrounding the region may further dampen the appeal of the single currency as the governments operating under the single currency struggle to get their house in order.

As the euro-area faces a deepening recession, the ECB is widely expected to retain a dovish tone for monetary policy, but we may see central bank President Mario Draghi show a greater willingness to lower the benchmark interest rate further as the economic downturn in Europe threatens price stability.

As the relative strength index on the EURUSD falls back from overbought territory, we may see a short-term correction ahead of the ECB and EU meeting scheduled for February 7, but we may see a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 should the events fail to generate an improved outlook for the euro-area.

British Pound: Maintains Bullish Trend, Ex-BoE’s Gieve Sees More Easing

The British Pound bounced back on Monday to preserve the upward trend from the 2009 low, and the sterling may track higher ahead of the Bank of England (BoE) interest rate decision on tap for Thursday as the GBPUSD appears to be carving out a higher low around the 38.2% Fib from the 2009 low to high around 1.5680.

Although the BoE is widely expected to maintain its current policy this week, former Monetary Policy Committee member John Gieve sees a ‘substantial chance’ that the central bank will expand monetary policy further this week as the U.K. struggles to emerge from the recession, and saw little need for the committee to adopt a nominal GDP target as the board sees above-target inflation over the policy horizon.

As the GBPUSD stands at a critical juncture, we would need to see the pair come off of trendline support to maintain a bullish forecast for the pair, and the short-term rebound in the sterling may turn into a larger move to the upside should the BoE adopt a more hawkish tone for monetary policy.

U.S. Dollar: Hits Fresh Monthly High- ISM New York, Factor Orders on Tap

The greenback extended the advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh monthly high of 10,213, and the reserve currency may track higher throughout the North American trade as the economic docket is expected to show an improved outlook for the world’s largest economy.

Although the ISM New York Business Conditions survey is expected to narrow to 53.0 from 54.3 in December, we’re expecting to see a 2.3% jump in factory orders, and a slew of positive developments should prop up the USD as it dampens speculation for more Fed easing. As the economic docket for the U.S. remains fairly light for the first full week of February, we may see broader risk themes heavily influence the dollar over the coming days, but we may see a growing number of central bank officials talk down expectations for more quantitative easing as the region gets on a more sustainable path.

FX Upcoming

--- Written by David Song, Currency Analyst

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

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