Talking Points

  • British Pound: Construction Expands At Faster Pace
  • Euro: Price Pressures Intensify, All Eyes On ECB
  • U.S. Dollar: ADP Employment, Fed's Beige Book on Tap

The Euro pared the decline from the previous day to maintain the narrow range carried over from the end of February, and the single-currency may hold steady ahead of the European Central Bank interest rate decision scheduled for Thursday as investors weigh the prospects for future policy. The ECB is widely expected to hold the benchmark interest rate at 1.00% in March, but the central bank may reinforce its hawkish tone for monetary policy as price pressures in Europe intensify. Producer prices in the Euro-Zone increased at an annualized pace of 6.1% in January to mark the fastest pace of growth since September 2008, and the Governing Council may show an increased willingness to reestablish its exit strategy later this year as it maintains its one and only mandate to ensure price stability.

As the central bank pledges to curb the risk for inflation, speculation for higher borrowing costs could spark a bullish breakout in the EUR/USD, and the pair may make a run at 1.3900 as investors anticipate the Governing Council to normalize monetary policy in 2011. However, with the EU scheduled to hold a special summit on March 11, the euro-dollar may trend sideways over the near-term, and the single-currency may face headwinds in the coming days as European policy makers struggle to address the sovereign debt crisis. In turn, the near-term rally in the EUR/USD could be short-lived, and the pair could be carving out a double-top in March as the risk for contagion continues to bear down on market sentiment.

The British Pound advanced to a high of 1.6323 as the economic docket reinforced an improved outlook for future growth, and the near-term rally in the sterling may gather pace going forward as market participants speculate the Bank of England to lift the benchmark interest rate off the record-low over the coming months. Construction in the U.K. unexpectedly expanded at a faster pace in February, with the PMI rising to 56.5 from 53.7 in the previous month, and the central bank may see scope to gradually normalize monetary policy during the first-half of 2011 as the recovery gather pace. In turn, there could be a growing shift within the MPC, and expectations for higher borrowing costs should help to prop up the sterling as investors anticipate the BoE to raise the key rate by 75bp over the next 12-months.

The greenback lost ground during the overnight trade, but we may see the dollar regain its footing going into the North American trade as equity futures foreshadow a lower open for the U.S. market. At the same time, the ADP labor report is expected to show private payrolls increase another 180K in February after climbing 187K during the previous month, and the rise is employment would certainly bode well for Friday's Non-Farm Payrolls report as market participants expect the U.S. economy to add 193K jobs during the same period. In addition, the Fed is scheduled to release its Beige Book report at 19:00 GMT, and an upward revision in the central bank's economic forecast could spark a bullish reaction in the greenback as the outlook for growth and inflation improves.