Euro Reaches All Time High
1.50 Broken, Now What?
New York, March 4, 2008
Historical highs for the Euro verses the Dollar have set off an economic frenzy. With the continuing negative news from the US economy many wonder – what will happen next?
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Below is an article written by Boris Schlossberg, Senior Currency Strategist and John Kicklighter, David Rodriguez, Currency Analysts of DailyFX.com. The article briefly outlines what to look for in the coming week for both the Euro and the Dollar. If you have additional questions regarding this article please contact the DailyFX research team at research@dailyfx.com
One interesting and enjoyable way to follow the Euro’s rise and fall is to trade currencies with a “Demo” Account. To try currency trading visit www.fxcm.com. Open a free practice trading account, trade the Euro and US Dollar with $50,000 in virtual money.
Dollar - 1.50 Broken, Now What?
The key event risk will occur on Friday when traders see the NFPs for February. Markets are looking for a tepid albeit an improved print of 40K. However, given the very negative trend in weekly jobless claims which have averaged more that 350K for the past four weeks, a second straight month of job losses could well be the outcome. Should that occur, the dollar could tumble even more.
Dollar – 1.50 Broken Now What?
It finally happened. After three failed attempts over the past several months the EURUSD broke the 1.5000 barrier and barreled to 1.5200 as the case for decoupling became clearer by the day. US economic data continued to disappoint sinking to a six year low while EZ data produced mainly upside surprises. As we’ve said many times before, much to the consternation of euro bears the EZ economy is not crumbling despite disadvantageous exchange rates, high energy costs and a restrictive monetary policy.
The greenback on the other hand was further pummeled by Chairman Bernanke’s dour testimony which suggested that the Fed will continue to lower rates, irrespective of the massive inflationary risks building up within the US economy. The chairman repeatedly stressed the need for “balance” essentially telegraphing to the markets that the Fed is far more concerned with stimulating growth rather than controlling price pressures. The net effect of Dr. Bernanke’s rhetoric was more dollar liquidation as traders now fully expect a 50bp cut in March which would widen the spread between the dollar and the euro to 150bp in euro’s favor.
Next week the market will get a glimpse at the latest US ISM data from both services and manufacturing. It will be interesting to see if the decline in the dollar will have any positive impact on exporters, but as of now the consensus estimate is for the survey to slip below the 50 boom/bust line into contraction territory. The key event risk however will occur on Friday when traders see the NFPs for February. Markets are looking for a tepid albeit an improved print of 40K. However, given the very negative trend in weekly jobless claims which have averaged more that 350K for the past four weeks, a second straight month of job losses could well be the outcome. Should that occur, the dollar could tumble even more.
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar. – BS
Euro – Friendly Data Helps
While US data offered nothing but the dour drumbeat of disappointment, the economic news from the EZ was decidedly more friendly this week. The IFO report printed at 104 taking the market by surprise since most were looking for a lower reading of 102.8. Last week we noted that IFO may be the key determinant of direction in the pair, stating that, “If the IFO does indeed show significant weakness, all the hand wringing about ECB being too hawkish could drive the pair right down to the bottom of the recent range. However, should IFO remain at last months levels the case for decoupling will only grow and the pair could make a run to new highs as the decupling thesis will be confirmed.”
With growth in the EZ clearly not slowing nearly as badly as in US, the markets finally came to the realization of our often stated contention that the ECB will remain at 4% far longer than the consensus believes while the Fed will be forced to reduce rates consistently for the rest of the year. Once that idea became accepted by the vast majority of participants, the floodgates opened and 1.5000 figure fell by the wayside.
Next week, the EZ calendar will be relatively quiet with only the ECB meeting a possible market mover. No one expects the ECB do anything but remain stationary. However, the always colorful ECB chief Jean Claude Trichet will be hard pressed to defend the bank’s unrelenting hawkishness. If he acknowledges the risk of an slowdown in the EZ economy, EURUSD could come in for some profit taking as traders will anticipate that Mr. Trichet is setting up the market for a possible rate cut in Q2 of this year. On the other hand if Mr. Trichet remains resolute in his emphasis on price stability, the euro express will continue to roll.
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