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• Euro: ECB Favors Rate Cut In 2013, Bundesbank Lowers Growth Forecast

• British Pound: Rising U.K. Inflation Expectations To Spur Hawkish BoE

Euro: ECB Favors Rate Cut In 2013, Bundesbank Lowers Growth Forecast

The Euro slipped to a fresh weekly low of 1.2913 as a growing number of European Central Bank (ECB) officials showed a greater willingness to lower the benchmark interest rate further, and the pair should continue to give back the rebound from November (1.2659).

There are reports that the majority of the Governing Council would support a rate cut amid the deepening recession in the euro-area, and we may see the ECB continue to embark on its easing cycle in the following year as the economic downturn threatens price stability.

Indeed, the Bundesbank cut its growth forecast for Europe’s largest economy as Germany is now expected to expand a mere 0.4% in 2013, and we may see the euro-area face a protracted recession as the debt crisis continues to drag on the real economy. As the fundamental outlook for the region deteriorates, growing speculation for record-low borrowing costs should produce further declines in the exchange rate, and we may see the EURUSD make another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as interest rate expectations falter.

British Pound: Rising U.K. Inflation Expectations To Spur Hawkish BoE

The British Pound extended the decline from the previous day as the larger-than-expected decline in manufacturing and industrial production dampened the outlook for growth, but we may see the Bank of England adopt a more hawkish tone for monetary policy amid the stickiness in price growth.

According a survey by the BoE, inflation expectations for the next 12-months increased an annualized 3.5% after expanding 3.2% in August, and we should see the central bank shift gears in 2013 as price growth is expected to hold above the 2% target over the next two years.

As a growing number of Monetary Policy Committee officials drop their dovish tone, the shift in the policy outlook instills a bullish outlook for the British Pound, and we may see the sterling consolidate ahead of the BoE Minutes due out on December 19 as the central bank appears to be lowing moving away from its easing cycle.

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--- Written by David Song, Currency Analyst