Talking Points

  • Euro: Germany To Review Firewalls In March, ECB Deposits Hit Record-High
  • British Pound: Maintains Range, U.K. Recovery To Gather Pace
  • U.S. Dollar: China Growth To Slow, ISM Non-Manufacturing On Tap

Euro: Germany To Review Firewalls In March, ECB Deposits Hit Record-High

The Euro bounced back from an overnight low 1.3159 as Germany pledged to resume talks on increasing the scope of the European Stability Mechanism, but the rebound in the EURUSD may be short-lived as Greece struggles to strike a deal with private creditors. DSW, an investor protection group in Germany, spoke out against the debt deal and argued that investors should reject the agreement, and the heightening risk of a Greek default could spark another selloff in the exchange rate as the fundamental outlook for the region turns increasingly bleak.

As the euro-area slips back into recession, the European Central Bank is likely to maintain a dovish outlook for monetary policy, but we may see President Mario Draghi strike a more balanced tone for the region following the second Long Term Refinancing Operation. However, it seems as though the LTRO may not be having the desired effect as overnight deposits to the ECB surged to a record-high of EUR 820.8B, and the Governing Council may have little choice but to expand policy further in 2012 as the region remains vulnerable to future shocks. Nevertheless, as the EURUSD holds above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we may see the exchange rate make another run at the 50.0% Fib (1.3500) ahead of the ECB rate decision, but dovish comments coming out of the ECB could sink the single currency as market participants see the central bank pushing the benchmark interest rate below 1.00% over the coming months. In turn, we may see the EURUSD trade lower going into the end of the week, and the pair may threaten the upward trend from earlier this year as the debt crisis continues to drag on investor confidence.

British Pound: Maintains Range, U.K. Recovery To Gather Pace

The British Pound pared the decline to 1.5784 to maintain the range carried over from the previous month, and the sterling may continue to track sideways over the near-term as market participants weigh the fundamental outlook for the U.K. Indeed, currency traders may turn a blind eye to the Bank of England rate decision as the central bank is widely anticipated to revert back to a wait-and-see approach, but the slew of even risk on tap for later this week may push the GBPUSD as the data is expected to highlight a more robust recovery for the U.K. In turn, a round of positive developments could push the British Pound back towards 1.6000, and the GBPUSD may continue to retrace the decline from the previous year should we see the BoE look to conclude its easing cycle in 2012.

U.S. Dollar: China Growth To Slow, ISM Non-Manufacturing On Tap

The greenback gained ground during the overnight trade as China lowered its 2012 growth forecast to 7.5% from 8.0%, and the shift away from risk-taking behavior may pick back up during the North American session should the U.S. ISM Non-Manufacturing report fall short of market expectations. Indeed, service-based activity in the world's largest economy is projected to expand at a slower pace in February, but a below-forecast print could weigh on market sentiment as it dampens the outlook for global growth. In turn, we may see the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR) pare the decline to 9,869, and the reserve currency may trend higher over the coming days as it carves out a higher low coming into March.

--- Written by David Song, Currency Analyst