Speculation surrounding the prospects for future policy kept the euro within a narrow range on Friday, but the single-currency may face additional headwinds going into the following as market participants expect Portugal to share Ireland’s illfate. Speculation surrounding the prospects for future policy kept the euro within a narrow range on Friday, but the single-currency may face additional headwinds going into the following as market participants expect Portugal to share Ireland’s ill fate. The EU said that “determined action” is needed to restore investor confidence after the group curbed the startup fund for the European Stability Mechanism to EUR 16B from the proposed EUR 40B drawn up earlier this month, and went onto say that “risks remain” on the economic outlook at the region faces an uneven recovery. As the group delays detailed plans of increasing the lending capacity of the European Financial Stability Facility and fails to address the growing risk of contagion, the near-term rally in the EUR/USD could be short-lived, and fears surrounding the debt crisis may continue to bear down on market sentiment as the EU struggles to meet on common ground. Nevertheless, expectations for a European Central Bank rate hike may help to prop up the single-currency over the near-term, and the single-currency may continue to retrace the decline from back in November as the Governing Council adopts a highly hawkish tone for future policy. ECB board member Gertrude Tumpel-Gugerell said that it is “important” for the central bank to gradually normalize monetary policy during an interview with Format magazine, and argued that the interest rate remains “extremely low” as the economic recovery in Europe gathers pace. As the Governing Council looks to reestablish its exit strategy in the second-half of the year, the upward trend in the EUR/USD looks poised to carry into the following month, but the uncertainties surrounding Europe may curb demands for the single-currency as the EU maintains a relaxed approach in addressing the sovereign debt crisis. The British Pound slipped to a fresh weekly low of 1.6059 as interest rate expectations remained battered, and the GBP/USD may continue to fall back towards 1.6000 as it searches for support. According to Credit Suisse overnight index swaps, investors are now pricing 50bp worth of rate hikes for the next 12-months, which compares with expectations for a 75bp rise in borrowing costs just earlier this week, and the neutral policy stance held by the Bank of England may continue to bear down on the exchange rate as investors scale back speculation for a rate hike in the first-half of 2011. In turn, the GBP/USD may continue to consolidate over the following week, and the pair may trend sideways going into April as investors weigh the prospects for future policy. The U.S. dollar bounced back against most of its major counterparts on Friday as investors scaled back their appetite for risk, but the greenback may trade heavy going into the end of the week as the economic docket reinforces a mixed outlook for future growth. The final 4Q GDP report showed economic activity expanded 3.1% during the last three-months of 2010 amid an initial forecasts for a 2.8% expansion in the growth rate, while personal consumption increased 4.0% versus earlier projections for a 4.1% rise. Indeed, we saw a small reaction in the major currencies, with the U.S. dollar gaining ground following the release, and investors may show a muted reaction to the U. of Michigan survey due out later today as market participation thins ahead of the weekend.

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