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Can Euro Stop Its Slide?

Last updated 2/3/2009 6:00 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Australia and Japan announce stimulus plans
• BOJ will buy shares from banks
• Asian markets pull back after strong open
• Citi may spend $36 Billion to boost lending
• OIl up slightly at $40/bbl
• Gold holds $900/oz barely

Overnight Eco

• JPY Monetary Base 3.9% vs 1.8%
• AUD Trade Balance .0.59B vs. 1.05B
• AUD Average Cash Earnings -1.4% vs. -1.5% eyed
• AUD RBA Rate Decision 100bp cut as expecetd to 3.25%
• EUR German Retail Sales worse at -0.2% vs 0.5% expected
• GBP Construction PMI bounces to 34.5 vs. 28.8 forecast
• EUR PPI -1.3% softer than expected

Event Risk on Tap

• USD Pending Home Sales expected at 0.0%
• USD Total Vehicle Sales expected at 10.2M

Price Action

• USD/JPY rallies to 9000 on BOJ stimulus plan but sells off the highs into Europe
• AUD/USD spikes to 6400 post RBA cut but can't hold the highs into North America
• GBP/USD holds steady at 1.4200 as construction PMI proves supportive
• EUR/USD capped at 1.2915 for now as eco data contiunues ot depress

The EUR/USD drifted lower in early European trade after an  initial burst of risk appetite dissipated in wake of further evidence of slowing consumer demand in the region.  The pair climbed above the 1.2900 barrier in late Japanese trading on the back of an announcement  by BOJ that the central bank would purchase up $111.5 Billion of Japanese banking shares. However, the enthusiasm faded after the release of German Retails Sales disappointed once again sending the pair down to test support at 1.2800 figure.  

German retail sales declined -0.2% against expectations of  0.5% gain indicating that consumer demand in the region’s largest and most important economy remains moribund as workers continue to be concerned  about job security in the wake of a second consecutive month of rising German unemployment. Additionally EZ PPI data printed colder than expected at -1.3% vs. -1.1% forecast demonstrating yet again that price pressures are virtually non-existent in the EZ economy.

Given this dynamic many market participants wonder why the ECB would choose to wait until their meeting in March to lower rates further and part of underlying weakness in the euro may be due to the fact that traders have already discounted the rate cut in the pair. For the past week the EUR/USD has been under tremendous pressure due to concerns regarding fragmentation in the EZ. Today’s dour economic news only reinforces the sense of urgency for more cooperative policy response from the European union and until the market sees some evidence of such response the pair is likely to be under pressure.

Meanwhile cable held steady at 1.4200 for most of the night until EURGBP demand for the London fix pushed the pair lower. UK Construction PMI data surprised to the upside printing at 34.5 vs. 28.8 forecast. Although the gauges remain well below expansionary levels, this the second PMI reading this week that has shown a measure of improvement. As such the latest economic news from UK suggest that perhaps some sort of stabilization of demand is under way providing a modicum of support for the currency and removing any fear that BoE will lower rates by more than the expected 50bp.

In North America today, the calendar is relatively light with only Pending Homes and Vehicle Sales on the docket.  The data is expected to be weak, but it will likely take backstage to the development in Washington DC. As we’ve noted before,  the passage of the Obama stimulus package will be of primary concern to the currency market, with so much dollar support coming from the assumption that US  economy will be able to rebound first from the global economic slowdown. Ironically enough, the dollar bull party may be short lived once FX traders begin to calculate the massive funding costs of the legislation, but for now the benefit of the doubt is given to the greenback and unless there is news of a legislative bottleneck the flows should continue for the rest of the day.

FX Upcoming

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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.