Euro Drops Through 1.30 - More Weakness Ahead?

Last updated 4/20/2009 4:01 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD broke the key psychological barrier of 1.3000 in early Asian trade this morning after comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor. The ECB council continues to be divided over the proper monetary policy path given the economic weakness in the region and this disagreement amongst policymakers has created tremendous uncertainty for the currency as traders deciding to sell first and ask questions later.

The fundamental driver behind euro’s weakness is the prevailing worry over continuing job losses in the 16 member union, particularly in its largest economy – Germany. Job losses are now putting tremendous financial pressure on the Employment Agency of Germany. The Agency warned that it could run out of funds by October as conditions continue to deteriorate.

We have always believed that German unemployment was the key long term factor in determining ECB policy posture. Despite stern rhetoric regarding price stability, we’ve always thought that policy would quickly give way to politics the moment German unemployment accelerated. With unemployment increasing for the past four months, EZ monetary officials are now under tremendous pressure to act. The days of NATO (No Action Talk Only) are over and the central bank may have to seriously consider quantitative easing as compliment to lower interest rates.

Having broken the 1.3000 barrier, the EUR/USD has found short term support in early European trade, but its direction this week will likely be driven by the economic calendar. With ZEW, PMI surveys and IFO all on the docket, if currency traders do not see any stabilization or upticks in the data, the unit could see further downside price action to 1.2850 before the week’s end.

Sell Euro-Dollar Below $1.30

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.