Forex: Euro Correction To Gather Pace As ECB Delays Exit Strategy, All Eyes On U.S. Non-Farm Payrolls

The Euro sold off during the press conference with European Central Bank President Jean-Claude Trichet, and the near-term correction in the single-currency may gather pace going into the end of the week as the central bank softens its hawkish outlook for monetary policy.

Talking Points

• British Pound: BoE Maintains Current Policy
• Euro: ECB Delays Exit Strategy Further
• Canada Dollar: Business Spending To Slow In April
• U.S. Dollar: Benefits From Risk Aversion, All Eyes On NFP's

The Euro sold off during the press conference with European Central Bank President Jean-Claude Trichet, and the near-term correction in the single-currency may gather pace going into the end of the week as the central bank softens its hawkish outlook for monetary policy. After holding the benchmark interest rate at 1.25%, Mr. Trichet said that the economic outlook for the euro-area remains ‘broadly balanced,' although the risk for price growth remains tilted to the ‘upside,' but left out to his pledge to implement strong vigilance against inflation as uncertainties remain ‘elevated.' Moreover, the central bank head said that the Governing Council will act when needed as the underlying momentum within the real economy gathers pace, and went onto say that the board will continue to monitor price developments very ‘closely' in order to stem the risk for second round effects.

As the ECB delays its exit strategy further, investors are now pricing borrowing costs in Europe to increase by 75bp over the next 12-months according to Credit Suisse overnight index swaps, and softening expectations for higher interest rates should continue to bear down on the exchange rate as investors weigh the prospects for future policy. As the EUR/USD carves out a near-term top in May, with the relative strengthen index falling back from overbought territory, the exchange rate may fall back towards former resistance around 1.4500-20 as it searches for support, but the correction could be short-lived as the pair continues to maintain the upward trend from earlier this year.

The British Pound pared the overnight advance to 1.6543 as service-based activity in the U.K. slowed for the second time in 2011, and the GBP/USD may continue to consolidate over the next 24-hours of trading as the investors weigh the outlook for monetary policy in the U.K. Indeed, the Bank of England held the benchmark interest rate 0.50% while maintaining its asset purchase target at GBP 200B in May, but currency traders showed a fairly muted reaction to the announcement as the central bank refrained from releasing a policy statement. In turn, investors will certainly look towards the BoE's quarterly inflation report due out on May 11, which is likely to take out some the steam from the policy meeting minutes that are due out on the 18th, and the central bank may continue to talk down speculation for higher borrowing costs in Britain as growth and inflation cools. As the GBP/USD holds above former resistance around 1.6400, the pair is likely to face range-bound price action in the days ahead, but the pullback from the yearly high (1.6745) over the near-term as the pair threatens the 20-Day SMA at 1.6445.

The Canadian dollar remained battered on Thursday, with the USD/CAD pushing above the 50-Day SMA (0.9667) for the first time since March, and the loonie may face additional headwinds throughout the North American trade as business spending in Canada is expected to expand at a slower pace in April. As the Ivey purchasing manager index is expected to weaken to 65.5 from 73.2 in March, the data could spark a bearish reaction in the loonie as the Bank of Canada maintains a neutral outlook for monetary policy, and Governor Mark Carney is likely to retain his pledge to ‘carefully consider' future rate hikes at the next rate decision on May 31 as private sector activity cools. In turn, the rebound in the USD/CAD may continue to gather pace in the days ahead, which could expose the 100-Day SMA at 0.9807, but the near-term correction could be short-lived as the economic docket for Friday as expected to show a slower pace of growth in U.S. employment.

The U.S. dollar gained ground against most of its major counterparts as currency traders scaled back their appetite for yields, but the reserve currency may consolidate ahead of the highly anticipated Non-Farm Payrolls report due out on Friday at 12:30 GMT as market participants expected to see a slower pace of employment growth in April. The greenback is likely to face heavy volatility immediately following the release as there remains a high risk we will see the figures miss market expectations, but the data could generate a bullish reaction in the greenback as risk trends continue to dictate price action in the currency market. As market participation thins ahead of the weekend, attempting to trade the NFP's certainly entails a lot of risk, but we may see the rebound in risk aversion carry into the week ahead as market sentiment falters.

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Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
CAD	12:30	8:30	Building Permits (MoM) (MAR)	-2.3%	9.9%
USD	12:30	8:30	Non-Farm Productivity (1Q P)	1.0%	2.6%
USD	12:30	8:30	Unit Labor Costs (1Q P)	0.8%	-0.6%
USD	12:30	8:30	Initial Jobless Claims (APR 30)	410K	429K
USD	12:30	8:30	Continuing Claims (APR 23)	3649K	3641K
USD	13:30	9:30	Fed Chairman Ben Bernanke Speaks on U.S. Economy	--	--
USD	13:45	9:45	Bloomberg Consumer Comfort Index (MAY 1)	--	-45.1
CAD	14:00	10:00	Ivey Purchasing Managers Index s.a. (APR)	64.4	73.2
CAD	14:00	10:00	Ivey Purchasing Managers Index (APR)	66.0	73.2

Currency	GMT	Release	Expected	Actual	Comments
NZD	22:45	Employment Change (QoQ) (1Q)	0.6%	1.4%	Marks the largest increase since 1Q 2007, jobless rate falls for fir since 3Q 2010.
NZD	22:45	Employment Change (YoY) (1Q)	0.8%	1.8%
NZD	22:45	Unemployment Rate (1Q)	6.7%	6.6%
NZD	22:45	Participation Rate (QoQ) (1Q)	68.1%	68.7%
AUD	1:30	Building Approvals (MoM) (MAR)	5.0%	9.1%	Rises for the first time this year.
AUD	1:30	Building Approvals (YoY) (MAR)	-25.2%	-18.1%
AUD	1:30	Retail Sales s.a. (MoM) (MAR)	0.5%	-0.5%	Declines for the first time since October.
AUD	1:30	Retail Sales Ex Inflation(QoQ) (1Q)	0.6%	0.0%
CNY	2:30	HSBC Purchasing Manager Index Services (APR)	--	51.6	Service-base activity slows on tightening policy.
CHF	7:00	Foreign Currency Reserves (APR)	--	199.9B	Falls for second month.
GBP	8:30	Purchasing Manager Index Services (APR)	56.0	54.3	Slows for second time this year.
GBP	8:30	Official Reserves (Changes) (APR)	--	$1663M	First decline in four-months.
EUR	10:00	German Factory Orders s.a. (MoM) (MAR)	0.4%	-4.0%	Contracts for the first time in 2011.
EUR	10:00	German Factory Orders n.s.a. (YoY) (MAR)	15.4%	9.7%
GBP	11:00	Bank of England Interest Rate Decision	0.50%	0.50%	Likely to see another 6-3 split within the MPC.
GBP	11:00	Bank of England Asset Purchase Target	200B	200B
EUR	11:45	European Central Bank Interest Rate Decision	1.25%	1.25%	Softens hawkish outlook for inflation.