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Forex: Euro at Risk as EU Meeting Disappoints, Pound to Hold Steady

David Song

Talking Points

  • Euro: EU Meeting Takes Center Stage- Cyprus, Exchange Rate in Focus
  • British Pound: Weighed by Growth Concerns, Inflation Report on Horizon
  • U.S. Dollar: Benefits From Risk Aversion, FOMC’s Yellen on Tap

Euro: EU Meeting Takes Center Stage- Cyprus, Exchange Rate in Focus

The Euro advanced to a high of 1.3411 as the group of European finance ministers convenes in Brussels to discuss a potential bailout package for Cyprus, but the meeting may fail to generate an improved outlook for the region should the governments operating under the monetary union continue to take a reactionary approach in tacking the risks surrounding the region.

Despite hopes of seeing a tentative agreement for the periphery country, European Central Bank board member Joerg Asmussen argued that delaying the decision till the German elections in September ‘won’t work,’ and said ‘an aid programme for Cyprus will be in place by the end of March’ in order to avoid a default.

At the same time, Dutch Finance Minister Jeroen Dijsselbloem said the euro exchange rate could also be discussed at the meeting as the persistent strength in the local currency dampens the outlook for growth and inflation, while Germany’s Economy Ministry warned ‘measures that target weakening the currency won’t make a lasting contribution to improving that competitiveness’ amid the ongoing slack in the real economy.

As ECB President Mario Draghi adopts a more dovish tone for monetary policy, there’s growing speculation that the central bank head will push the benchmark interest rate to a fresh record-low, and we may see the Governing Council carry out its easing cycle throughout 2013 as the economic downturn threatens price stability.

As the EURUSD holds within the previous day’s range, the pair may consolidate throughout the remainder of the North American trade, but negative headlines coming out of the meeting may trigger a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as interest rate expectations deteriorate.

British Pound: Weighed by Growth Concerns, Inflation Report on Horizon

The British Pound gave back the advance from the previous week and slipped to 1.5668 amid fears that the Bank of England will lower its growth forecast while delivering its quarterly inflation report due later this week, but the central bank may continue to talk down bets for additional monetary support as price growth is expected to hold above target over the policy horizon.

Beyond the ongoing slack in the U.K., the BoE may continue to strike a hawkish tone for monetary policy as sticky inflation continues to sap purchasing power for households and businesses, and we may see the Monetary Policy Committee switch gears over the coming months as the central bank anticipates a more robust recovery this year.

As the GBPUSD maintains the range from the previous week, we may see the pair track sideways ahead of the inflation report, and we will keep a close eye on the 38.2% Fib from the 2009 low to high around 1.5680 as the pair appears to be carving out a higher low around the key figure.

U.S. Dollar: Benefits From Risk Aversion, FOMC’s Yellen on Tap

The greenback pared the decline from the end of the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a high of 10,299, and the reserve currency may track higher throughout the North American trade as risk sentiment wanes.

Although the economic docket remains fairly light for Monday, we have FOMC board member Janet Yellen scheduled to speak on the economy later today, and we may see the dollar post fresh monthly highs as a growing number of Fed officials drop their dovish tone for monetary policy. Indeed. Ms. Yellen may no longer see scope to conduct more quantitative easing amid the more broad-based recovery in the world’s largest economy, and we may see the committee start to discuss a tentative exit strategy as the outlook for growth and inflation improves.

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--- Written by David Song, Currency Analyst

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