DailyFX | December 5 2012 8:55 EST
The Euro struggled to hold its ground ahead of the European Central Bank (ECB) interest rate decision amid the negative developments coming out of the region, and the single currency may continue to give back the rebound from the previous month as the fundamental outlook for the euro-area deteriorates.
Euro: Spain Bond Auction Disappoints, ECB Rate Decision In Focus
The EURUSD slipped to an overnight low of 1.3060 as manufacturing and service-based activity in Europe contracted for 10 consecutive months, while retail spending slipped another 1.2% in October to mark the second-largest decline for 2012.
At the same time, Spain’s bond auction further dampened the appeal of the single currency as the region sold EUR 4.25B of bonds versus the EUR 4.50B target, and the weakening outlook for the region may produce a short-term reversal in the exchange rate should the European Central Bank (ECB) show a greater willingness to ease monetary policy further.
Although the ECB is widely expected to keep the benchmark interest rate at 0.75% in December, President Mario Draghi may show a greater willingness to cut borrowing costs further as the deepening recession dampens the outlook for price stability. In turn, we will be looking for hints of another rate cut as Mr. Draghi is scheduled to deliver the policy statement tomorrow at 13:30 GMT, and the pullback from 1.3125 may turn into a larger correction as the relative strength index comes off of overbought territory.
As the bullish momentum in the EURUSD gets exhausted, the ECB rate decision could be the fundamental catalyst to trigger a sharp reversal in the exchange rate, and we may see the euro-dollar make another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 should the ECB carry its easing cycle into the following year.
British Pound: U.K. Cuts Growth Forecast Ahead Of BoE Rate Decision
The British Pound slipped to 1.6085 as Chancellor of the Exchequer George Osborne lowered the growth forecast for theU.K., but we may see the GBPUSD consolidate over the next 24-hours of trading as the Bank of England (BoE) is expected to maintain a wait-and-see approach in 2013.
As the Monetary Policy Committee (MPC) preserves its current policy, we should see the BoE refrain from releasing a policy statement, but the neutral stance may spark a bullish reaction in the British Pound as the central bank slowly moves away from its easing cycle.
Despite the protracted recovery in the U.K., we may see a growing number of BoE officials sound more hawkish in 2013 as inflation stubbornly holds above the 2% target, and we may see the MPC start to discuss a tentative exit strategy in the year ahead amid the growing threat to price stability.
In turn, we may see the GBPUSD coil up for another run at 1.6200 – the 23.6% Fib from the 2009 low to high – and the pair may ultimately threaten the downward trend carried over from 2011 amid the shift in the policy outlook.
U.S. Dollar: ADP Misses Forecast, Service-Based Activity To Slow
The greenback regained its footing on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to 9,947, but we may see the reserve currency struggle to hold its ground ahead of the Non-Farm Payrolls report as headlines coming out of the world’s largest economy dampens the outlook for growth.
Indeed, the ADP employment report set a weakened outlook for NFPs as private sector employment increased 118K in November amid forecasts for a 125K print, and a slew of dismal developments coming out later today may dampen the appeal of the greenback as market participants maintain still see the Fed expanding its balance sheet further over the coming months.
Factory Orders (OCT)
ISM Non-Manufacutring Composite (NOV)
DOE U.S. Crude Oil Inventories (NOV 30)
DOE U.S. Distillate Inventory (NOV 30)
DOE U.S. Gasoline Inventories (NOV 30)
ECB's Joerg Asmussen Speaks on Euro Economy
Reserve Bank of New Zealand Interest Rate Decision
--- Written by David Song, Currency Analyst
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