Euro Relief Rally Falters, Cyprus Faces Negative Consequences

By David Song, Currency Analyst 25 March 2013 13:20 GMT Talking Points

Euro: Cyprus to Shrink Banks- Moody’s Warns of ‘Negative Consequences’ British Pound: U.K. Mortgage Demands Falter, Former Support Offers Resistance U.S. Dollar: Dallas Fed Manufacturing, Fed’s Dudley on Tap Euro: Cyprus to Shrink Banks- Moody’s Warns of ‘Negative Consequences’

The Euro climbed to an overnight high of 1.3047 as Cyprus agreed to shrink its banking sector in order to obtain EUR 10.0B in emergency funding, but the lingering threat of a bank-run may present another near-term shock for the single currency as the governments operating under the monetary union struggle to get their house in order.

As Cyprus still needs to raise the EUR 5.8B required to secure the EUR 10.0B bailout, further development surrounding the rescue package may prop up the Euro over the next 24-hours of trading, and the relief rally may spark another run at the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as European policy makers increase their effort to avert a euro-area exit.

However, Moody’s Investor Services warned that the banking crisis in Cyprus ‘will have profound long-term negative consequences for the sovereign’ and went onto say that the region ‘will remain at risk of default and exit from the euro area for a prolonged period’ as the periphery country remains mired in a recession.

As the ongoing turmoil in the financial system diminishes the longer-term outlook for the euro-area, the weakening outlook for growth and inflation may continue to dampen the appeal of the single currency, and we may see the periphery countries become increasingly reliant on external support as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

In turn, the European Central Bank (ECB) may have little choice but to further embark on its easing cycle throughout 2013, and the EURUSD may struggle to maintain the rebound from 1.2842 as the central bank remains poised to push the benchmark interest rate to a fresh record-low.

British Pound: U.K. Mortgage Demands Falter, Former Support Offers Resistance

The British Pound failed to maintain the advance from the previous week, with the GBPUSD falling back below the 1.5200 figure, and the sterling may continue to consolidate in the coming days as the pair appears to be carving a near-term top just ahead of former support- the 50.0% Fib from the 2009 low to high around 1.5260.

Indeed, the British Pound struggled to hold its ground as a report by the British Bankers’ Association showed loans for home purchases increased 30,506 in February amid forecasts for a 33,500 print, and the sterling may struggle to maintain the rebound from the yearly low (1.4830) should the economic docket continue to a risk for a triple-dip recession in the U.K.

In turn, we may see the GBPUSD work its way back towards the 61.8% retracement around 1.4840-50, and the pair may face range-bound prices ahead of the next Bank of England (BoE) interest rate decision on April 4 as market participants weigh the outlook for monetary policy.

U.S. Dollar: Dallas Fed Manufacturing, Fed’s Dudley on Tap

The greenback firmed up on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 10,413, and the reserve currency may continue to gain ground during the North American trade as manufacturing activity in the world’s largest economy is expected to pick up in March.

Indeed, the Dallas Fed Manufacturing index is expected to increase to 3.7 from 2.2 in February, and we may see a growing number of Fed officials adopt a more upbeat tone for the world’s largest economy as the recovery gradually gathers pace. In turn, we may see New York Fed President William Dudley adopt an improved outlook for growth and inflation, and the FOMC may start to discuss a tentative exit strategy over the coming months as the region gets on a more sustainable path.

FX Upcoming

Dallas Fed Manufacturing Activity (MAR)

Fed's William Dudley to Speak on U.S. Economy

Fed's Bernanke, BoE's King, IMF's Blanchard Speak on Crisis

Trade Balance (New Zealand dollars) (FEB)

Balance (YTD) (New Zealand dollars) (FEB)

Exports (New Zealand dollars) (FEB)

Imports (New Zealand dollars) (FEB)

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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25 March 2013 13:20 GMT

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