Euro Hopes to Fizzle- Sterling Hit by Moodys Downgrade

Talking Points

• Euro: CESifo Warns of Deepening Recession on Record-High Unemployment
• British Pound: Moody’s Cuts U.K. Credit Rating, Gap Needs To Be Covered
• U.S. Dollar: Fed’s Fisher, Lockhart on Tap- Humphrey-Hawkins in Focus

Euro: CESifo Warns of Deepening Recession on Record-High Unemployment

The Euro rallied to an overnight high of 1.3303 as European policy makers struck an improved outlook for the region, but the fundamental developments on tap for later this week may continue dampen the appeal of the single currency as the euro-area faces a deepening recession.

Indeed, European Union Economic and Monetary Affairs Commissioner Olli Rehn talked down the risks surrounding the region and said the ‘reforms are starting to pay off, the deficits are declining and Europe will gradually return to growth,’ while Bank of Greece Governor George Provopoulos talked down the risk of a euro-area breakup as the periphery country gradually emerges from the debt crisis.

In contrast, the CESifo, an economic research group in Europe, warned that the push for greater austerity ‘will dampen economic activity in almost all memberStates,’ and went onto say that ‘domestic demand looks set to shrink further in 2013,’ as the region faces record-high unemployment.

As the economic docket is expected to show easing price pressures in Europe along with another uptick in the jobless rate, a slew of dismal developments may encourage the European Central Bank (ECB) to push the benchmark interest rate to a fresh record-low, and the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the economic downturn threatens price stability.

As the EURUSD manages to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we may see the euro-dollar consolidate ahead of the ECB interest rate decision on tap for the following week, but the pair may struggle to hold its ground should we see a slew of dismal developments coming out of the euro-area.

British Pound: Moody’s Cuts U.K. Credit Rating, Gap Needs To Be Covered

The British Pound gapped lower and tagged a fresh yearly low of 1.5067 as Moody’s Investor Services cut the U.K’s AAA credit rating to AA1.

In response, former Bank of England (BoE) board member Andrew Sentence warned of ‘downward pressures on sterling’ as the rating agency holds a negative outlook for the region, and went onto say that the government ‘needs to pay more attention to supply-side policies’ as the region struggles to emerge from the recession.

As the relative strength index on the GBPUSD continues to trade in oversold territory, we may see the pair further retrace the rebound from back in 2010, but the gap from the Sunday open may get filled before we see another sharp move to the downside should the fundamental developments coming out of the U.K. reflect a stronger recovery for 2013.

U.S. Dollar: Fed’s Fisher, Lockhart on Tap- Humphrey-Hawkins in Focus

The greenback pared the advance from the previous week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,395, and the reserve currency may continue to consolidate ahead of the Humphrey-Hawkins Testimony on tap for later this week as market participants weigh the outlook for monetary policy.

Nevertheless, as a growing number of Fed officials adopt a more hawkish tone for monetary policy, the fresh batch of comments from Dallas Fed President Richard Fisher and Atlanta Fed President Dennis Lockhart may prop up the dollar over the next 24-hours of trading, and we may see the bullish sentiment surrounding the greenback gather pace over the near to medium-term as the world’s largest economy gets on a more sustainable path.

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— Written by David Song, Currency Analyst

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

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Euro Hopes to Fizzle- Sterling Hit by Moodys Downgrade