Euro Struggles as Hollande Pushes for Exchange Rate Target

Talking Points

• Euro: France’s Hollande Pushes For ‘Medium-Term’ Exchange Rate Target

• British Pound: NIESR Cuts Growth Forecast, Warns of Protracted Recovery

• U.S. Dollar: Rallies to Fresh February High, ISM Non-Manufacturing in Focus

Euro: France’s Hollande Pushes For ‘Medium-Term’ Exchange Rate Target

The Euro bounced back from an overnight low of 1.3457 as the economic docket showed service-based activity in Europe contracting at a slower pace in January, but fears of a prolonged recession is likely to produce further headwinds for the single currency as the debt crisis continues to drag on the real economy.

Indeed, French President Francois Hollande argued that the governments operating under the monetary union should set a ‘medium-term objective’ for the single currency ‘that appears most realistic, that is most in line with the real economy,’ and we may see a growing number of European officials push for a weaker euro as the persistent strength in the local currency diminishes the outlook for global trade.

As the outlook for growth and inflation deteriorates, the European Central Bank (ECB) remains poised to embark on its easing cycle throughout 2013, and the Governing Council may show a greater willingness to lower the benchmark interest rate further as the economic downturn threatens price stability.

In turn, the ECB interest rate decision scheduled for Thursday may serve as the fundamental catalyst to spark a reversal in the EURUSD, and we may see a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 for a test of near-term support. However, the euro-dollar may threaten the upward trend carried over from the previous year as the relative strength index falls back from overbought territory, and the bullish sentiment surrounding the single currency may fizzle out in the coming days as European policy makers maintain a reactionary approach in addressing the downside risks surrounding the region.

British Pound: NIESR Cuts Growth Forecast, Warns of Protracted Recovery

The British Pound struggled to maintain the overnight advance to 1.5803 as the National Institute of Economic and Social Research warned of a protracted recovery in the U.K., and we may see the sterling continue to consolidate ahead of the Bank of England (BoE) interest rate decision on tap for later this week as market participants weigh the outlook for monetary policy.

Indeed, the NIESR encouraged Chancellor of the Exchequer George Osborne to scale back on austerity as the group now sees the economy growing 0.7% this year amid an initial forecast for a 1.1% rise GDP, but we should see the BoE stick to its current policy as the central bank sees above-target inflation over the policy horizon.

However, the Monetary Policy Committee may refrain from releasing a policy statement as they stick to the sidelines, and we may have to wait for the quarterly inflation report due out on February 13 to better gauge the fundamental outlook for the British Pound as we see a growing number of BoE officials adopt a hawkish tone for monetary policy.

As the GBPUSD continues to bounce off of the multi-year trendline, we will maintain our bullish forecast for the pair, and we should see the pound-dollar continue to retrace the sharp decline from the previous month as it carves out a higher base around the 38.2% Fib from the 2009 low to high around 1.5680.

U.S. Dollar: Rallies to Fresh February High, ISM Non-Manufacturing in Focus

The greenback bounced back on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,233, but the reserve currency may struggle to gain ground during the North American trade as the economic docket is expected to show service-based activity in the world’s largest economy expand at a slower pace.

As the ISM Non-Manufacturing survey is expected to fall back to 55.0 from 56.1 in December, a marked slowdown in private sector activity may dampen the appeal of the USD, and a dismal print may trigger a short-term correction in the USDOLLAR as the relative strength index comes up against overbought territory.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	15:00	10:00	ISM Non-Manufacutring Composite (JAN)	55.0	56.1
USD	15:00	10:00	IBD/TIPP Economic Optimism (FEB)	47.3	46.5

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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