Forex: Euro Struggles To Hold Ground As Rate Expectations Falter, U.S. Dollar Continues To Face Mixed Price Action

The Euro pared the sharp rally spurred by the FOMC rate decision, with the exchange rate falling back from a fresh yearly high of 1.4881, and the single-currency may continue to lose ground throughout the North American trade as investors scale back speculation for higher borrowing costs in Europe.

Talking Points

• British Pound: Overbought Following Rally To 1.6745
• Euro: ECB Rate Expectations Falter
• U.S. Dollar: 1Q GDP, Pending Home Sales On Tap

The Euro pared the sharp rally spurred by the FOMC rate decision, with the exchange rate falling back from a fresh yearly high of 1.4881, and the single-currency may continue to lose ground throughout the North American trade as investors scale back speculation for higher borrowing costs in Europe. European Central Bank board member Yves Mersch said the Governing Council will unwind its emergency measures “at an appropriate pace” while speaking in Luxembourg, and reiterated that the board sets monetary policy for the entire region and not for individual members as it maintains its one and only mandate to ensure price stability.

Even as the ECB toughens its stance against inflation, market participants appear to have changed their outlook for monetary policy as Credit Suisse overnight index swaps now reflect a zero percent chance for a 25bp in May, and the euro may trade heavy going into the end of the week as interest rate expectations falter. In turn, the EUR/USD may continue to consolidate throughout the remainder of the day, and we may see a near-term correction unfold going into the following month as the relative strength index falls back from its recent highs. Once the RSI falls back from overbought territory, the exchange rate may fall back towards the 78.6% Fibonacci retracements from 2009 high to the 2010 low around 1.4440-50 to test for near-term support, but a break below the 20-Day SMA (1.4450) could produce a test of former resistance around 1.4250 if we see interest rate expectations deteriorate further ahead of the next ECB rate decision on May 5th.

The British Pound lost ground throughout the European trade, with the GBP/USD paring the advance to 1.6745, but the exchange rate may continue to push higher over the near-term as it breaks out of the narrow range from earlier this month. As the U.K. skirts a double-dip recession, the Bank of England may raise its economic assessment at its next interest rate decision in the week ahead, but the MPC may refrain from releasing a policy statement as market participants expect the central bank to maintain its wait-and-see approach in May. As a result, the GBP/USD could enter another phase of consolidation in the days ahead, but the bullish momentum underlying the sterling could gather pace over the near-term as the relative strength index crosses into overbought territory.

U.S. dollar price action remained mixed on Wednesday, with the USD/JPY tipping to a low of 81.47, but the greenback may come under pressure during the North American trade as the economic docket is expected to show a slower pace of growth in the world's largest economy. The advance 1Q GDP report is expected to show the growth rate for the U.S. increased an annualized 2.0% following the 3.1% expansion during the last three-months of 2010, while personal consumption, which is one of the leading drivers of growth, is projected to advance 2.0% during the same period after rising 4.0% in the fourth-quarter. As the prospects for a sustainable recovery wane, currency traders may show a muted reaction to the pending home sales report due out at 14:00 GM, which is anticipated to show a 1.5% rise in purchases, but a marked shift in market sentiment could fuel demands for the reserve currency as risk trends continue to dictate price action in the foreign exchange market.

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

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	12:30	8:30	Gross Domestic Product (Annualized) (1Q A)	1.8%	3.1%
USD	12:30	8:30	Personal Consumption (1Q A)	2.1%	4.0%
USD	12:30	8:30	Gross Domestic Product Price Index (1Q A)	2.4%	0.4%
USD	12:30	8:30	Core Personal Consumption Expenditure (QoQ) (1Q A)	1.4%	0.4%
USD	12:30	8:30	Initial Jobless Claims (APR 23)	395K	403K
USD	12:30	8:30	Continuing Claims (APR 16)	3680K	3695K
USD	12:30	8:30	Chicago Fed National Activity Index (MAR)		-0.04
USD	13:45	9:45	Bloomberg Consumer Comfort Index (APR 24)		-42.6
USD	14:00	10:00	Pending Home Sales (MoM) (MAR)	1.5%	2.1%
USD	14:00	10:00	Pending Home Sales (YoY) (MAR)		-9.3%

Currency	GMT	Release	Expected	Actual	Comments
NZD	21:00	Reserve Bank of New Zealand Interest Rate Decision	2.50%	2.50%	Pledges to keep cash rate steady for ‘some time.'
GBP	23:01	GfK Consumer Confidence Survey (APR)	-27	-31	Lowest since February 2009.
JPY	23:15	Nomura/JMMA Manufacturing Purchasing Manager Index (APR)	--	45.7	Weakens for second month.
JPY	23:30	Tokyo Consumer Price Index (YoY) (APR)	0.0%	-0.1%	Price growth weakens for the third consecutive month.
JPY	23:30	Tokyo CPI Ex-Fresh Food (YoY) (APR)	0.2%	0.2%
JPY	23:30	Tokyo CPI Ex Food, Energy (YoY) (APR)	0.1%	0.0%
JPY	23:30	National Consumer Price Index (YoY) (MAR)	0.0%	0.0%	Inflation holds flat for the four straight months.
JPY	23:30	National CPI Ex-Fresh Food (YoY) (MAR)	-0.1%	-0.1%
JPY	23:30	National CPI Ex Food, Energy (YoY) (MAR)	-0.6%	-0.7%
JPY	23:30	Jobless Rate (MAR)	4.8%	4.6%	Holds steady for second month.
JPY	23:30	Job-To-Applicant Ratio (MAR)	0.61	0.63
JPY	23:30	Household Spending (YoY) (MAR)	-7.0%	-8.5%	Biggest decline since series began in 2011.
JPY	23:50	Industrial Production (MoM) (MAR P)	-10.6%	-15.3%	Largest contraction on record.
JPY	23:50	Industrial Production (YoY) (MAR P)	-8.5%	-12.9%
JPY	4:00	Vehicle Production (YoY) (MAR)	--	-57.3%	Biggest decline in nearly a quarter century.
JPY	4:31	Bank of Japan Interest Rate Decision	0.10%	0.10%	Pledges to take further steps if needed.
JPY	5:00	Housing Starts (YoY) (MAR)	-1.3%	-2.4%	First decline since May 2010.
JPY	5:00	Annualized Housing Starts (MAR)	0.814M	0.807M
JPY	5:00	Construction Orders (YoY) (MAR)	--	-11.0%	Falls for the second time this year.
EUR	6:00	German Import Price Index (MoM) (MAR)	1.1%	1.1%	Cools for the first time in four months.
EUR	6:00	German Import Price Index (YoY) (MAR)	11.3%	11.3%
EUR	6:45	French Consumer Spending (MoM) (MAR)	0.2%	-0.7%	Third decline in 2011.
EUR	6:45	French Consumer Spending (YoY) (MAR)	3.7%	2.6%
EUR	7:55	German Unemployment Change (APR)	-37K	-37K	Falls for 22 straight months, lowest unemployment in 19 years.
EUR	7:55	German Unemployment Rate s.a. (APR)	7.0%	7.1%
EUR	8:00	Italian Business Confidence (APR)	103.5	103.0	First decline in three-months.