Talking Points

  • Euro: ECB Cuts Growth Forecast, Head-and-Shoulders Top In Progress
  • British Pound: BoE Maintains Current Policy, Watching Downward Trend In RSI
  • U.S. Dollar: Weighed By Risk Appetite, To Consolidate Ahead Of NFPs

Euro: ECB Cuts Growth Forecast, Head-and-Shoulders Top In Progress

The Euro pared the advance to1.3273 as the European Central Bank lowered its growth forecast for 2012 and the single currency remains poised to face additional headwinds over the near-term as the fundamental outlook for the euro-area turns increasingly bleak. Although ECB President Mario Draghi sees the Long Term Refinancing Operations aiding the economy, the rise in overnight deposits at the central bank suggests that the second three-year loan facility may not be having the desired effect, and we are likely to see the Governing Council keep the door open to expand monetary policy further as the central bank highlights a risk for a prolonged recession.

Nevertheless, as European policy makers see Greece averting a default, an imminent debt deal could prop up the single currency over the next 24-hours of trading, but broader concerns regarding the implementation of the second bailout package may continue to drag on the exchange rate as the EU struggles to restore investor confidence. As the EURUSD fails to push back above the 10-Day SMA at 1.3283, the pair looks to be carving a head-and-shoulders top in March, but we would need the 2/9 high (1.3320) to hold in order to complete the reversal pattern. In turn, we will be closely watching the 50-Day SMA (1.3082) as it continues to provide interim support, and will maintain a bearish outlook for the EURUSD as the sovereign debt crisis continues to drag on the real economy.

British Pound: BoE Maintains Current Policy, Watching Downward Trend In RSI

Indeed, market participants showed a muted reaction to the Bank of England interest rate decision as the central bank reverted back to a wait-and-see approach, and the British Pound should continue to trade sideways over the near-term as market participants look towards the policy meeting minutes due out on March 21. As the GBPUSD remains well supported by the 50-Day SMA (1.5673), the short-term rebound in the exchange rate could ultimately produce another run at 1.6000, but we may see the pound-dollar continue to retrace the decline from the end of October should the BoE talk down speculation for more quantitative easing. However, we will be closely watching the relative strength index as it maintains the downward trend from the previous month, and the mixed technical outlook for the GBPUSD will keep us on the sidelines until we see a clear direction bias for the pair.

U.S. Dollar: Weighed By Risk Appetite, To Consolidate Ahead Of NFPs

The greenback struggled to hold its ground on Wednesday, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,889, and market participants may continue to move away from the reserve currency as they increase their appetite for risk. Nevertheless, as the highly anticipated U.S. Non-Farm Payrolls report comes into focus, we should see the dollar consolidate going into the key event, and we may see a positive development prop up the USD as the Federal Reserve talks down speculation for another large-scale asset purchase program. As the Fed softens its dovish tone for monetary policy, we should see fundamentals playing a greater role in driving price action for the greenback, and the more robust recovery could spark a shift in the policy outlook as Fed officials become increasingly optimistic towards the world's largest economy.

--- Written by David Song, Currency Analyst