Talking Points

• Euro: Germany Scales Back Push for Austerity, G-7 Meeting in Focus

• British Pound: UK Construction Misses Forecast, BoE Inflation Report on Horizon

Euro: Germany Scales Back Push for Austerity, G-7 Meeting in Focus

The Euro slipped to a fresh monthly low of 1.2976 ahead of the G-7 meeting as European policy makers continued to scale back their push for austerity, and the single currency may ultimately give back the rebound from April (1.2743) as the fundamental outlook for the region remains clouded with high uncertainty.

Indeed, German Finance Minister Wolfgang Schaeuble said the governments operating under the monetary union have ‘enough room to maneuver’ on public finances as the euro-area remains mired in recession, and warned about the ongoing deterioration in the labor market as the region faces record-high unemployment. In turn, the European Central Bank (ECB) is likely to come under increased pressure to carry out its easing cycle throughout 2013, and we may see the Governing Council continue to take unprecedented steps to shore up the ailing economy as a growing number of central bank officials see scope for negative interest rates in Europe.

As commercial banks are expected to pay back another EUR 6.36B of the Long-Term Refinancing Operations (LTRO), narrowing balance sheets may continue to drag on private sector lending, and we should see the ECB continue to strike a dovish tone for monetary policy as the outlook for growth and inflation remains weak.

Nevertheless, as the G-7 meeting in the U.K. comes into focus, the group of world officials may continue to criticize the reactionary approach taken by the EU, and the single currency remains poised to face additional headwinds over the near to medium-term as it carves out a lower top in May.

As we continue to watch the head-and-shoulders pattern play out, we should see a more meaningful move to the downside, and the EURUSD may work its way back to the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it struggles to maintain the rebound from the previous month.

British Pound: UK Construction Misses Forecast, BoE Inflation Report on Horizon

The British Pound extended the decline from earlier this week, with the GBPUSD slipping to a fresh monthly low of 1.5377, but the weakness may be short-lived should the Bank of England (BoE) strike an improved outlook for the U.K.

Indeed, the GBPUSD is threatening the bullish trend dating back to March as U.K. Construction Outputs increased 12.1% in March amid forecasts for a 15.0% print, but the BoE’s Inflation report on tap for May 15 may prop up the sterling as the central bank sees a slow but sustainable recovery in Britain.

As the region skirts a triple-dip recession, the BoE may raise its fundamental assessment for the region, and the central bank may sound more hawkish this time around as the U.K. economy is expected to face above-target inflation over the policy horizon.

Nevertheless, as the relative strength index on the GBPUSD struggles to maintain the upward trend from earlier this year, we may see the sterling fall back towards the 50.0% Fib from the 2009 low to high around 1.5260, but the shift in the policy outlook should continue to prop up the British Pound as market participants scale back bets for more quantitative easing.

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--- 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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