Euro Rebounds After Rate Cut

Last updated 1/16/2009 4:27 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

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• Gold bounces to $819/oz as $800 holds for now

Overnight Eco

• CHF PPI -0.7% vs. -0.6% forecast
• EUR Trade Balance n/a

Event Risk on Tap

• USD CPI expected at -0.9%
• USD TIC Long-Term Purchases
• USD Capacity Utilization Rate expected at 74.7%
• USD Industrial Production expected at -0.8%
• USD Prelim UoM Consumer Sentiment expected at 59.5

Price Action

• USD/JPY runs to 9060 as risk assumption returns
• AUD/USD back above 6700 as carry bid
• GBP/USD above 1.4800 following risk flow
• EUR/USD bounces with conviction off 1.3050 lows

The euro rebounded in Asian and early European trade tonight after yesterday’s ECB’s decision to lower rates by 50bp to 2.00%. The pair reached its lowest level in a month yesterday when it hit a low of 1.3024 after Jean Claude Trichet admitted that the economic situation in the Eurozone was deteriorating rapidly and suggested that more cuts would be coming.

There were however, two key take away points from yesterday’s press conference that provided some support for the euro. First Mr. Trichet noted that any future rate cuts will be postponed until March at the earliest, thus removing the threat of perhaps another 25bp cut at the February meeting three weeks away. Secondly, he dismissed the idea of pushing rates to zero, in effect providing a possible floor for EZ rates at 1% or a bit higher – a policy that would leave the euro with a slight interest rate advantage over the dollar and the yen.

Little wonder then, that the euro bounced back tonight supported by friendlier equity market performance in Asia and carried higher primarily on EUR/JPY flows which rose nearly 2 big figures since yesterday’s North American close. With ECB event risk out of the way the likely near term fate of the EUR/USD lies in the slew of micro economic data due to be released over the next few weeks. For EUR/USD to hold its ground, traders will need to see some signs of stabilization in EZ economic downturn. As we’ve noted earlier the pair has carved out a broad 1.30-1.40 range but if the economic news form Euroland continues to disappoint the pair could easily drop into the 1.20’s in the foreseeable future.

On the immediate front, however, today’s US CPI and TICs data could prove to be market moving, especially if the later release shows an acceleration of outflows from U S capital markets. Last month’ s paltry 1.5B figure was a sharp disappointment and today the consensus call is for a small rebound to 11.0 Billion. Nevertheless, if the data prints a negative number the dollar may come under some pressure as fears of capital flight from US will no doubt begin to escalate. The threat of capital outflows, rather than poor economic data is greenback’s greatest vulnerability and today’s TICs report may cause some turbulence if it confirms this thesis.

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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.