Forex: Euro Advances On Higher Inflation, British Pound Outlook Remains Flat

Heightening price pressures in Europe pushed the single-currency to a fresh weekly high of 1.4232, and the EUR/USD looks poised to make another run at 1.4300 as it maintains the upward trend from earlier this year.

Talking Points

  • British Pound: U.K. Consumer Confidence Holds At Two-Year Low
  • Euro: Inflation Quickens, Ireland Stress Test on Tap
  • U.S. Dollar: All Eyes On Non-Farm Payrolls

Heightening price pressures in Europe pushed the single-currency to a fresh weekly high of 1.4232, and the EUR/USD looks poised to make another run at 1.4300 as it maintains the upward trend from earlier this year. The headline reading for Euro-Zone inflation unexpectedly increased at an annualized pace of 2.6% in March to mark the fastest pace of growth since October 2008, and the European Central Bank may turn increasingly hawkish going into the following month as it maintains its one and only mandate to ensure price stability.

As market participants expect borrowing costs in Europe to increase by 125bp over the next 12-months, the rise in interest rate expectations should help to prop up the single-currency, but the euro could face headwinds going into the end of the week as Ireland’s commercial bank stress test is anticipated to show an impending need for fresh capital.

Given the ongoing turmoil within the European financial system, retiring ECB board member Guy Quaden said the Governing Council should be “cautious” in raising the benchmark interest rate at the policy meeting next month, and highlighted the importance of “preserving” the credibility for the euro as the region struggles to contain the risk for contagion.

Meanwhile, Portugal missed its 2010 budget deficit target of 7.3 per cent as the shortfall accounted for 8.6 per cent of GDP, and it seems as though it will only be a matter of time before the country seeks an international bailout as the government faces record-high borrowing costs. As investors speculate Portugal to share Ireland’s ill fate, fears surrounding the sovereign debt crisis are likely to bear down on the exchange rate, and the EUR/USD may trend sideways ahead of the ECB interest rate decision next week as market participants weigh the prospects for future policy.

The British Pound slipped to 1.6016 on Thursday as the economic docket reinforced a weakened outlook for the U.K., and the sterling may continue to lose ground going into the following month as the prospects for future growth deteriorate. The GfK consumer confidence survey held steady at -28 for the second month in March to mark the lowest reading since 2009, while a separate report by the Bank of England showed an unexpected rise in mortgage defaults during the first-three months of the year.

In response, BoE board member David Miles said that the impact of future rate hikes on the economy will change as the housing market faces a “painful transition,” and went onto say that higher spreads between mortgage rates and the benchmark interest will “create an issue for the MPC” as the central bank aims to balance the risks for the region. As the economic outlook remains clouded with high uncertainty, the BoE may retain its wait-and-see approach throughout the first-half of the year, and the GBP/USD may trade within a broad range over the near-term as region faces heightening inflation paired with subdued growth.

The U.S. dollar continued to lose ground against most of its major counterparts on Thursday, but the greenback may regain its footing during the North American trade as investors scale back their appetite for risk. However, with the highly anticipated non-farm payrolls report on tap for tomorrow, the major exchange rates may consolidate over the next 24 hours of trading, and the greenback is likely to face increased volatility on Friday as employment in the world’s largest economy is expected to increase another 190K in March.

Will the EUR/USD Maintain The Upward Trend From Earlier This Year? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: [email protected]

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

CAD

12:30

08:30

GDP (mum) JAN

0.5%

0.5%

 

CAD

12:30

08:30

GDP (YoY) JAN

3.2%

 

USD

12:30

08:30

Chicago Purchasing Manager MAR

69

71.2

 

USD

12:30

08:30

Continuing Claims (Mar 19)

3705K

3721K

 

USD

12:30

08:30

Initial Jobless Claims (Mar 26)

380K

382K

 

USD

13:45

09:45

Bloomberg Consumer Comfort (Mar 27)

-48.9

 

USD

13:45

09:45

NAPM-Milwaukee MAR

63

 

USD

14:00

10:00

Factory Orders FEB

0.5%

3.1%

 

 

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

GfK Consumer Confidence Survey MAR

-30

-28

Remains near multi-month lows

GBP

23:01

Hometrack Housing Survery (mum) MAR

-0.1%

Continues contracting trend

GBP

23:01

Hometrack Housing Survey (YoY) MAR

-3.2%

JPY

23:15

Nomura/JMAA Manufacturing PMI MAR

46.4

Drops sharply to multi-year low

AUD

23:30

RP Data-Rismakr House Px (mum) FEB

0.0%

Rebounds from contraction in Jan.

AUD

23:50

RP Data Rismark House Px (mum) FEB NSA

0.7%

AUD

00:30

Private Sector Credit (mum) FEB

0.3%

0.5%

Best since May ’10

AUD

00:30

Private Sector Credit (YoY) FEB

3.2%

3.4%

Rebounds from drop in Jan.

AUD

00:30

Retail Sales (mum) FEB

0.4%

0.5%

Continues rising trend

AUD

00:30

Building Approvals (mum) FEB

4.0%

-7.4%

3rd contraction in last 4

AUD

00:30

Building Approvals (YoY) FEB

-12.8%

-21.8%

4th straight contraction, declines accelerate

JPY

01:30

Labour Cash Earnings (YoY) FEB

0.3%

0.3%

Eases off 3-month high from Jan.

NZD

02:00

NBNZ Activity Outlook MAR

14.7

Lowest since July ’09

NZD

02:00

NBNZ Business Confidence MAR

-8.7

Drops sharply to contract for first time since April ’09

NZD

02:00

M3 Money Supply (YoY) FEB

5.2%

Continues recent strengthening trend

JPY

05:00

Annualised Housing Starts FEB

0.849M

0.872M

Highest since March ’09

JPY

05:00

Housing Starts (YoY) FEB

7.4%

10.1%

Fastest since Sept ’10

JPY

05:00

Construction Orders (YoY) FEB

19.5%

Rebounds from contraction in Jan.

GBP

06:00

Nationwide House Prices (mum) MAR

0.0%

0.5%

3rd expansion in last 4

GBP

06:00

Nationwide House Prices (Yoy) MAR

-0.6%

0.1%

Rises after 2 contractions

EUR

06:00

German Retail Sales (mum) FEB

0.4%

-0.3%

Show continued weakness in domestic demand

EUR

06:00

German Retail Sales (YoY) FEB

1.5%

1.1%

EUR

06:45

French Producer Prices (mum) FEB

0.8%

0.8%

Remain at robust levels

EUR

06:45

French Producer Prices (Yoy) FEB

6.2%

6.3%

Highest since Aug. ’08

EUR

07:55

German Unemployment Change MAR

-25K

-55K

Hiring continues despite global uncertainties

EUR

07:55

German Unemployment Rate MAR

7.2%

7.1%

EUR

08:00

Italian PPI (mum) FEB

0.8%

0.6%

Inflationary pressures keep climbing as energy prices climb.

EUR

08:00

Italian PPI (YoY) FEB

5.7%

EUR

09:00

Italian CPI (mum) MAR

0.3%

0.4%

 

EUR

09:00

Italian CPI (YoY) MAR

2.4%

2.5%

 

EUR

09:00

Euro-zone CPI Estimate (Yoy) MAR

2.4%

2.6%

Highest since Oct. ’08

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