Euro Holds Narrow Range as EU Aims to Bailout Greece, British Pound Testing Channel Support

The Euro bounced to a high of 1.3802 during the overnight trade on the back of U.S. dollar weakness, but the lack of momentum to retrace the previous day’s decline may keep the exchange rate within the downward trending channel from the January high (1.4581).

Talking Points
• Japanese Yen: Mixed Across the Board
• Pound: Testing Lower Bounds of Channel Formation
• Euro: ECB Reiterates Rates Are Appropriate
• US Dollar: Initial and Continuing Jobless Claims on Tap

Euro Holds Narrow Range as EU Aims to Bailout Greece, British Pound Testing Channel Support

The Euro bounced to a high of 1.3802 during the overnight trade on the back of U.S. dollar weakness, but the lack of momentum to retrace the previous day’s decline may keep the exchange rate within the downward trending channel from the January high (1.4581). Meanwhile, the European Union summit in Brussels was pushed back two hours due to snowy conditions, while policy makers came together ahead of the meeting to discuss possible bailout options for Greece, and comments from the EU is likely to move the markets as investors speculate Germany and France to lead the unprecedented efforts.

Nevertheless, the European Central Bank said “current rates remain appropriate” in its monthly report, and expects price pressures to remain subdued as policy makers anticipate an uneven recovery this year. Moreover, the central bank reiterated that the Governing Council could take further steps to unwind the emergency measures at its next meeting in March, and sees the economy growing at a moderate pace as “the outlook remains subject to uncertainly.” At the same time, the ECB argued “high levels of public deficits and debt place an additional burden on monetary policy,” and the central bank may keep borrowing costs at the record-low going into the second-half of the year as they maintain a dovish outlook for inflation. Meanwhile, wholesale price in Germany increased 1.3% in January after rising 0.2% in the previous month, while the annualize rate jumped 1.9% from a year earlier to mark the fastest pace of growth since October 2008.

The British Pound lost ground during the European trade, with the exchange rate pulling back from the high (1.5663) to remain little changed on the day, and we may see the GBP/USD continue to test the lower bounds of the channel formation from November as it fails to retrace the decline from Wednesday. As the economic docket for the U.K. remains bare for the rest of the week, we are likely to see risk trends drive price action for Cable but, we may see a short-term correction over the next few days of trading as the daily RSI approaches oversold territory.

The greenback lost ground against most of its currency counterparts, with the USD/JPY crossing back below the 10-Day SMA (89.91) to reach a low of 89.62, and we may see risk trends drive price action going into the North American session as the economic docket remains fairly light for the next 12-hours of trading. The U.S. labor market is expected to improve as economists forecast initial jobless claims to weaken to 465K in the week ending February 6 from 480K in the week prior, while continuing claims are projected to fall to 4600K as of January 30 from 4602K. Nevertheless, European Commission President Jose Barroso announced EU officials have reached an accord, which will be announced by the presidency following the summit, and the remarks from the meeting are likely to shake up the currency market as policy makers aim to take unprecedented steps to shore up the Euro-Zone.

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