Weekly Forex Outlook: Euro (EUR) Drops ahead of ECB Meeting

on Dec 10, 2012

The single currency declined on April 1 dragged down by expectations that the European Central Bank (ECB) will keep the Eurozone key rate at a record low 0.75 percent and concerns that unemployment in the bloc may have peaked in February. The yen was firm against the dollar ahead of the much anticipated Bank of Japan (BOJ) policy meeting this week under its new chief Haruhiko Kuroda.

The euro weakened against the US dollar (USD) on Monday, shedding 0.2 percent to trade at $1.2789, after losing 1.8 percent in March, newswires reported. Trading was quiet with Europe and some Asian markets remaining closed for Easter holidays.
The euro was under pressure with investors focusing on a report which is expected to show that unemployment in the bloc climbed to a record in February. The report is scheduled to be released on April 2, two days before ECB officials meet to set interest rates. Bloomberg quoted Hideki Shibata, a senior rates and currencies strategist at Tokai Tokyo Research Centre Co, as saying: “There may be talks at this week’s ECB meeting about something accommodative. The euro is being sold because of such a risk.”

The euro has been hovering near a four-month low against the dollar due to concerns that the Cyprus bailout agreement might be replicated elsewhere in the Eurozone in case of future financial rescue deals in the bloc. “I don’t think cuts in deposits would be applied to every other country in the Eurozone,” noted an unnamed trader at a European bank, as quoted by Reuters. “Still, investors will see some risk and there are also some issues with Italy, so the euro is likely to head toward $1.25.”

The yen climbed 0.4 percent to trade at 93.87 against the greenback after the BOJ reported that its Tankan survey showed that business sentiment improved in the first three months of 2013. The yen will stay in focus this week, with the new BOJ governor Haruhiko Kuroda presiding over his first policy meeting on April 3-4.
Bloomberg quoted Kengo Suzuki, a currency strategist at Mizuho Securities, as saying: “We’re focused on what the BOJ will do under the new leadership in response to investor expectations.”

Investors are largely expecting the BOJ to step up monetary easing to beat unwanted deflation. Reuters quoted Yunosuke Ikeda, senior currency economist at Nomura Securities, as noting that the dollar could fall below 94 yen on profit-taking with much of the aggressive easing already priced in. Ikeda however also sees investors focusing on the contrast between the BOJ, which is to expand stimulus, and the US Federal Reserve, which is seeking an exit from stimulus.

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Bloomberg reported that the Australian dollar (AUD) lost ground against its US counterpart on April 1 after a report showed that an index measuring manufacturing in China, Australia’s largest trading partner, was at 50.9 last month from 50.1 in February, falling short of analyst expectations. The Aussie declined 0.2 percent to trade at $1.0394.


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