DailyFX | April 3 2012 9:20 EDT
Heightening finance costs in the euro-area dampened risk-taking behavior on Tuesday, and the shift in market sentiment may gather pace during the North American trade as European policy makers struggle to restore investor confidence.
Euro: Continues To Carve Lower Top Ahead Of ECB Rate Decision
The EURUSD fell back from an overnight high of 1.3366 as rising borrowing costs in Europe renewed fears for contagion and the pair may continue to give back the advance from the previous month as the sovereign debt crisis continues to dampen the outlook for the euro-area. Indeed, European policy makers made an attempt to calm market jitters by talking down the risks surrounding the periphery nations, but a note from Goldman Sachs argued that the EUR 800B bailout fund is ‘not sufficient to credibly backstop the bigger non-core countries’ as the governments operating under the single currency struggle to tap the financial markets.
At the same time, Goldman warned that the bigger rescue fund does little to address the ‘debt overhang’ and went onto say that the European Central Bank is ‘best-positioned’ to tackle rising borrowing costs as the EU maintains a reactionary approach in addressing the debt crisis. Although the ECB is widely expected to keep the benchmark interest rate at 1.00% on Wednesday, market participants will certainly turn their attention to the policy statement accompanying the rate decision, and comments from President Mario Draghi could set the tone for future price action as currency traders weigh the outlook for monetary policy. However, as the Governing Council continues to monitor the impact of the Long Term Refinancing Operation, the central bank head may strike a balanced tone for the region, but Mr. Draghi may keep the door open to expand monetary policy further as the economy continues to face a risk for a prolonged recession. As the ECB rate decision comes into focus, we may see the EURUSD continue to track sideways over the next 24-hours of trading, but we will maintain our bearish call for the euro-dollar as the pair continues to carve out a lower top just below 1.3400.
British Pound: BCC Calls For Stronger Recovery, Consolidation Ahead
The British Pound slipped to 1.5967 on Tuesday as the British Chambers of Commerce encourage the government to foster a stronger recovery, and the GBPUSD may consolidate further over the next 24-hours of trading should the economic docket cast a weakened outlook for the U.K. However, as Bank of England officials anticipate to see a more robust recovery in 2012, the central bank is widely expected to maintain its current policy in April, and we may see the bullish sentiment underlining the sterling gather pace should the central bank continue to soften its dovish tone for monetary policy. As the GBPUSD maintains the upward trend from earlier this year, we are still looking for another run at the 23.6% Fibonacci retracement from the 2009 low to high around 1.6250, but we may see the pair consolidate over the near-term as market participants look forward to the BoE meeting minutes due out on April 18.
More to Follow...
--- Written by David Song, Currency Analyst
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