Euro, British Pound Extend Decline as Investors Scale Back Expectations for Rate Hike

The Euro tipped lower for the second day and slipped to a low of 1.3514 during the overnight trade as European policy makers and finance ministers met in Madrid to discuss the EUR 45B bailout plan for Greece.
Talking Points
•    Japanese Yen: Modestly Higher Against Most Currencies
•    Pound: Maintains Narrow Range
•    Euro: Consumer Prices Expand Less-Than-Expected
•    U.S. Dollar: Housing Starts, U. of Michigan Confidence Survey on Tap

Euro, British Pound Extend Decline as Investors Scale Back Expectations for Rate Hike

At the same time, Luxembourg Prime Jean-Claude Juncker said that there is “no indications” that the Greek government will ask for aid today, while Germany’s Finance Minister, Wolfgang Schaeuble, is scheduled to speak to the German parliament about the bailout of Greece on April 21.

Meanwhile, consumer prices in the Euro-Zone increased 0.9% in March, led by rising energy costs, while the annualized rate expanded 1.4% from the previous year amid forecasts for a 1.5% expansion. Moreover, the core rate of inflation increased 1.0% during the same period to top projections for a 0.9% rise, while the trade balance increased EUR 2.6B following the EUR 9.0B deficit in January as the rise in foreign demands outpaced the expansion in imports. Despite the rise in short-term inflation, the ECB expects to see subdued price growth over the policy horizon and expects price stability to be maintained over the medium-term, and the Governing Council is widely expected to hold a loose stance on monetary policy going into the second-half of the year as the central bank aims to balance the risks for the economies operating under the single-currency.

The British Pound bounced back from the low (1.5368) during the European trade to maintain the narrow range from earlier this week, and the exchange rate may continue to trend sideways ahead of the Bank of England minutes due out on Wednesday as investors weigh the outlook for future policy. The BoE is likely to maintain a dovish outlook as Governor Mervyn King expects to see inflation fall back below the 2% target, but a shift in the central bank’s economic outlook could stoke increased volatility in the exchange rate as policy makers aim to encourage a sustainable recovery. However, the GBP/USD appears to be carving out a near-term top as the recent rally fails to retrace the decline from February, which could lead the pair to fall back below the 50-Day SMA (1.5271), but a break below the 20-Day SMA (1.5201) could lead the pair to test the lower bounds of its recent range as the daily RSI continues to fall back from a high of 63.

U.S. dollar price action was mixed overnight, with the USD/JPY slipping to a low of 92.51, and the reserve currency could face increased volatility going into the North American session as the economic docket is expected to reinforce an improved outlook for future growth. Housing starts in the world’s largest economy is expected to expand to an annualized pace of 610K in March from 575K in the previous month, while building permits are anticipated to increase to 625K during the same period. In addition, the U. of Michigan confidence survey is projected to increase to 75.0 in April from 73.6 in the month prior, which would be the highest reading since January 2008, and the rise in consumer sentiment is likely to encourage an enhanced outlook for private spending as the economic recovery gathers pace.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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