Talking Points

  •  Euro: Greek PSI Talks Take Center Stage, ECB To Maintain Dovish Tone
  •  British Pound: BoE Sees Stronger Recovery, 50-Day SMA Key Level To Watch

Euro: Greek PSI Talks Take Center Stage, ECB To Maintain Dovish Tone

The Euro pared the overnight advance to 1.3163 as Greece struggles to secure a debt deal ahead of the deadline on Thursday, and the single currency may weaken further over the next 24-hours of trading should the European Central Bank strike a dovish tone for monetary policy. Although German Chancellor Angela Merkel's Cabinet approved the new EU fiscal pact, fears of a Greece default continues to drag on market sentiment, and the EURUSD may continue to track lower during the North American trade as European policy makers struggle to restore investor confidence.

Indeed, the ECB is widely expected to keep the benchmark interest rate on hold in March after conducting the second Long Term Refinancing Operation, but we may see President Mario Draghi talk up speculation for lower borrowing costs as the fundamental outlook for the euro-area deteriorates. As the region remains at risk of facing a prolonged recession, the central bank head may lay the ground works to ultimately push the interest rate below 1.00% in an effort to stem the downside risks for growth and inflation. As the EURUSD struggles to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, the 50-Day SMA (1.3076) may give out going into the end of the week, but headlines coming out of Europe could produce whipsaw-like price action in the euro-dollar as the Greek PSI talk takes center stage. In turn, we may see the EURUSD continue to retrace the rebound from the beginning of the year, which would expose the 2.6% Fib around 1.2630-50.

British Pound: BoE Sees Stronger Recovery, 50-Day SMA Key Level To Watch

The British Pound pared the sharp decline from earlier this week, with the GBPUSD advancing to an overnight high of 1.5758, but the lack of momentum to hold above the 38.2% Fib from the 2009 low to high (1.5730-50) threatens the range-bound price action carried over from the previous month as we continue to monitor the downward trend in the relative strength index. Nevertheless, we saw Bank of England board member Spencer Dale strike an improved outlook for the U.K. as he expects to see a more robust recovery later this year, and went onto say that the slower rate of inflation should help to encourage private sector consumption as it alleviates the squeeze in disposable income. As the BoE sees a diminishing risk of undershooting the 2% target for inflation, it seems as though the central bank will look to conclude its easing cycle in 2012, and the shift in the policy outlook may continue to prop up the sterling as market participants scale back speculation for more quantitative easing. Nevertheless, it is imperative that the GBPUSD continues to trade above the 50-Day SMA (1.5665) to preserve the range carried over from the previous month, and the exchange rate may continue to track sideways over the near-term as investors look forward to the BoE minutes due out on March 21.

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--- Written by David Song, Currency Analyst