Forex: Euro Extends Rally Amid Growing Hopes, Sterling Eyes 1.6300

Talking Points

• Euro: Cyprus Bailout ‘In Due Course,’ Growth Outlook Remains Weak

• British Pound: U.K. Outputs Disappoint, 1.6300 On Horizon

• U.S. Dollar: Risk Sentiment Picks Up, Fed’s Plosser On Tap

Euro: Cyprus Bailout ‘In Due Course,’ Growth Outlook Remains Weak

The Euro advanced to a fresh yearly high of 1.3351 as European Union Economic and Monetary Commissioner Olli Rehn sees the group drawing up a bailout program for Cyprus ‘in due course,’ but struck a rather cautious outlook for growth as the debt crisis continues to drag on the real economy.

Indeed, Mr. Rehn warned that ‘Europe is expected to return to growth only gradually in the course of 2013’ as the region faces record-high unemployment along with the persistent slack in private sector activity, and went onto say that the governments operating under the monetary union should be ‘cautious not to lose our international competitiveness’ as the fundamental outlook for the region remains clouded with high uncertainty.

Nevertheless, the fresh batch of comments from European Central Bank (ECB) President Mario Draghi suggests that the Governing Council will stick to the sidelines throughout the first-quarter amid signs of stabilization in the euro-area, but we may see a growing number of central bank officials show a greater willingness to lower the benchmark interest rate further as the economic downturn threatens price stability.

As the EURUSD maintains the preserves the upward trending carried over from 2012, the more neutral tone struck by the ECB may trigger a run at the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, but we will be keeping a close eye on the relative strength index as the oscillator approaches overbought territory.

British Pound: U.K. Outputs Disappoint, 1.6300 On Horizon

The British Pound slipped to an overnight low of 1.6105 as manufacturing and industrial outputs in the U.K. fell short of market expectations, but we’re seeing the sterling regain its footing going into the North American trade as market sentiment appears to be firming up.

As the GBPUSD bounces back from trendline support, the pound-dollar may continue to track higher ahead of the Bank of England (BoE) Minutes due out on January 23, and the policy statement may heighten the bullish sentiment surrounding the sterling should the central bank continue to talk down speculation for more quantitative easing.

As the BoE sees a growing risk for inflation, the shift in the policy outlook should prop up the sterling over the near to medium-term, and we are looking for another run at the 1.6300 figure as the GBPUSD preserves the bullish trend dating back to June.

U.S. Dollar: Risk Sentiment Picks Up, Fed’s Plosser On Tap

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) giving back the overnight advance to 10,071, and the reserve currency may face additional headwinds during the U.S. session as risk sentiment appears to be picking up.

Nevertheless, as a growing number of Fed officials take note of the more broad-based recovery in the world’s largest economy, we may see Philadelphia Fed President Charles Plosser strike a more hawkish tone for monetary policy, and easing bets for additional monetary support should shore up the USD going forward as the FOMC looks to conclude its easing cycle in 2013.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	14:30	09:30	Fed's Plosser Speaks on Economic Outlook in New Jersey
GBP	15:00	10:00	NIESR Gross Domestic Product Estimate (DEC)		0.10%
USD	19:00	14:00	Monthly Budget Statement (DEC)	-$1.0B	-$86.0B

--- 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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