The EUR/USD Correction Starts

Last updated 6/2/2009 5:32 AM ET (GMT -5) 2 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA keeps rates at 3.00% hints more cuts to come
• Geithner - Chinese have confidence in US policy efforts
• Equities lower in profit taking and fears that N.Korea will launch again
• Oil at S68/bbl
• Gold drops back to $971/oz.

Overnight Eco

• JPY Monetary Base 7.90%
• AUD Building Approvals 5.10% vs. 2.00% forecast
• AUD Current Account -4614M better than -5425M
• AUD RBA Rate Decision 3.00% as expected
• CHF GDP -2.40% vs -1.70%
• CHF SVME PMI 39.8 vs. 36.5
• GBP Construction PMI significantly better at 45.9 vs. 39.1
• GBP Net Lending to Individuals improves to 1.3B from 1.0B forecast
• GBP Mortgage Approvals 43K vs. 41K
• EUR Unemployment Rate 9.2% vs. 9.1% eyed

Event Risk on Tap

• USD Pending Home Sales expected at 0.4%
• USD Total Vehicle Sales expected at 9.5M

Price Action

• USD/JPY ranges between 9620 and 9680 for most of the night
• AUD/USD rallies to 8115 on better GDP anfd CA data but gives back after RBA turns dovish
• GBP/USD trades off 1.6400 but eco data remains supportive
• EUR/USD profit taking drops the pait to 1.4100 on a quiet data night

It was a night of correction for high beta pairs in the currency markets as greenback’s one way downward slide finally came to a halt amidst profit taking and some words reassurance from US Secretary Treasury Timothy Geithner. On a quiet night with little eco data on the calendar EUR/USD drifted lower to test the 1.4100 handle while Aussie came off the highs after a slightly dovish RBA statement that suggested rates may be cut further in the near future.

The EUR/USD was weaker in both the Asian and European sessions, pressured by profit taking, a selloff in stocks and the rise in the EZ unemployment rate to 9.2% from 9.1% forecast. The unemployment rate was the highest in more than 5 years and will likely get worse perhaps even reaching double digits by the fall if the higher exchange value of the unit pressures the profit margins the region’s vital export sector. Meanwhile Secretary Geithner stated that Chinese have confidence in US policy initiatives as he tried to boost the ailing dollar.

In Australia the better Current Account and Building Approval news was offset by dovish RBA statement that hinted of more rate cuts to come is the economy slowed further. As we noted earlier, “The slightly dovish cast of Governor Steven’s words suggests that RBA members continue to be concerned about further contraction in H2 of 2009 despite the fact that Australia was one of the few industrialized countries to avoid a recession this year. With Australian rates the highest in G-20 universe, the RBA certainly has the scope for further rate cutting if the country economy begins to slow once again. However, the possibility of declining Aussie yields took the wind out of the AUD/USD& nbsp; rally which has been one of the few carry trades left in the currency market.”

In UK the pound could not hold on to the 1.6400 handle despite a very healthy rise in construction PMI figures to 45.9 from 36.5 the month prior as profit taking overwhelmed the longs. Since the start of the week the pair has raced to within a few points of the 1.6500 handle and now faces a possible retrace as traders digest the gains. Of all the high beta currencies, sterling is the most sensitive to equity risk and therefore faces the possibility of the steepest correction if equities sell off for the rest of the day.

In North America, the eco calendar remains light until tomorrow with only pending sales figures on tap. Given the decline in new home sales last week, the number may miss to the downside especially in light of the spike n mortgage rates in recent weeks. If the Dow corrects in turn it could send the high beta currencies lower still as they work off the overbought conditions of the past weeks price action

FX Upcoming

Comments (2)

sufibo

June 02, 2009 at 08:37 AM ET

The Eur/usd just hit 1.4275 and the pattern is complete. I believe we are in for a free fall all the way to 1.3750. Assuming of course, that the pattern does not fail. So far, so good.

bschlossberg

June 02, 2009 at 09:36 AM ET

I don't know about 1.3700 but there was a lot supra national selling at the upper 1.4200's today so if the rejection today sticks I think eur goes lower as the week progresses

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.