Talking Points

  • Euro: Spain Bond Auction Disappoints, ECB Keeps Door Open For More Easing
  • British Pound: Maintains Upward Trending Channel Ahead Of BoE
  • U.S. Dollar: Index Hits Fresh Monthly High, To Consolidate Ahead Of NFPs

Euro: Spain Bond Auction Disappoints, ECB Keeps Door Open For More Easing

The Euro slipped to a fresh monthly low of 1.3106 as Spain sold EUR 2.59B in bonds versus the EUR 3.5B target, and it seems as though the European Central Bank will continue to carry out its easing cycle in 2012 as the region continues to face a threat for a prolonged recession. Indeed, the ECB left the door open to expand monetary policy further after holding the benchmark interest rate at 1.00%, and it seems as though the Governing Council is keeping inflationary concerns on the backburner as the growth outlook remains subject to downside risks.

Indeed, ECB President Mario Draghi argued that it is premature to discuss an exit strategy as the central bank continues to assess the impact of the Long Term Refinancing Operations, but it seems as though the second LTRO is not having the desired effect as banks across Europe continue to horde cash. As the governments operating under the single currency become increasingly reliant on monetary support, the ECB may have little choice but to ease policy further, and we may see Mr. Draghi look to target the benchmark interest rate as the fundamental outlook for the region remains bleak. In turn, we maintain our bearish outlook for the single currency, but we may see a short-term correction in the exchange rate as the EURUSD comes up against the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100. Nevertheless, 1.3000 remains key as the pair maintains the range from earlier this year, and we will wait for a break and a close below the figure to see a major reversal in the euro-dollar.

British Pound: Maintains Upward Trending Channel Ahead Of BoE

The British Pound extended the decline from earlier this week amid the shift away in risk-taking behavior, but we expect to see a rebound in the GBPUSD as the pair maintains the upward trending channel from earlier this year. Although we have the Bank of England interest rate decision on tap for Thursday, currency traders may show a greater reaction to the fundamental developments on tap for the next 24-hours of trading as the central bank refrains from releasing a policy statement. In light of the recent developments coming out of the U.K., the stronger-than-expected data suggests that the recovery will gather pace throughout 2012, and we may see the sterling outperform against its major counterparts should the BoE look to conclude its easing cycle later this year. In turn, we are still looking for another run at the 23.6% Fib from the 2009 low to high around 1.6250, and we may see the GBPUSD continue to retrace the decline from the previous year as the BoE continues to soften its dovish tone for monetary policy.

U.S. Dollar: Index Hits Fresh Monthly High, To Consolidate Ahead Of NFPs

The greenback continued to appreciate on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)climbing to a fresh monthly high of 10,037, and the reserve currency may continue to track higher over the remainder of the week as market participants scale back their appetite for risk. However, the weaker-than-expected ISM Non-Manufacturing report appears to be dampening demands for the dollar as it limits the Fed's scope to start normalizing monetary policy, and we may see the greenback consolidate ahead of the highly anticipated Non-Farm Payrolls report as we're expecting to see a slower rate of job growth in March. However, should NFPs top market forecast, a more robust recovery in the labor market should prop up the greenback, and we may see the USDOLLAR make another run at the 78.6% Fib around 10,118 as bets for QE3 dissipate.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong