Cyprus hits EUR, GBP retracing lower, USD firm ahead of FOMC

There are plenty of events and data to digest on both sides of the pond this week. In Europe, Cyprus’ bailout will be a key focus. The decision to ‘bail in’ in bank depositors aimed at raising EUR 5.8 billion by imposing a levy on deposits will be voted on today in Cyprus. While the EUR 10 billion bailout is small change compared to other Eurozone bailouts the deposit levy could have wide ranging repercussions on Eurozone bank deposits in other peripheral countries despite Cyprus’ case being labelled as “unique”.

Meanwhile, politics in Italy remains unpredictable, with discussions tomorrow between the President and political parties to try and form a government. There is little to suggest a deal is in the offing with the risk skewed towards protracted negotiations and fresh elections.

Data in the Eurozone is expected to a little more encouraging, with gains in Eurozone manufacturing confidence (albeit still in contraction territory), German ZEW investor confidence and IFO business confidence surveys likely. Also of note this week is the Bank of England MPC minutes and UK 2013 Budget and in particularly any change to the BoE’s mandate contained within the budget.

Markets likely to tread water ahead of Fed FOMC outcome. While no change to the USD 85 billion asset purchase program is likely the Fed may actually revise slightly lower their near term growth forecasts due mainly to fiscal policy developments despite recent encouraging data. It seems unlikely that the Fed will hint at any tapering off of QE but nonetheless, it will be difficult for the Fed to ignore recent positive data. On the data front, housing data in the form of housing starts and existing home sales will reinforce evidence of recovery in the housing market.

The EUR has already come under pressure as a result of Cyprus concerns and will struggle to reverse its losses. EUR/USD 1.2876 will offer some support in the near term and the fact that the speculative market has been short EUR over recent weeks may also limit some of the downside pressure. Nonetheless, any gains are likely to be sold into.

GBP/USD is also set to retrace lower, especially if the MPC minutes reveal a more dovish bias and/or any new mandate for the BoE is perceived to enable more policy easing. All of this leaves the USD in good form, with the USD index setting its sights on the psychologically important 83.00 level.

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