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EUR/USD Breaks 1.3500

Last updated 9/22/2011 5:36 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• EU PMIs drop into contraction
• Euro tests 1.3500 level ECB rumored to be buying IT bonds
• Nikkei off -2.07% Europe off -4.02%
• Oil at $83/bbl
• Gold at $1765/oz.

Overnight Eco

• NZD Gross Domestic Product (QoQ) (2Q) 0.1% vs. 0.5%
• CHF ZEW Survey (Expectations) (SEP) -75.7 vs. -71.4
• EUR EU PMI Composite (SEP A)
• EUR EU PMI Manufacturing (SEP A) 48.4 vs. 48.6
• EUR EU PMI Services (SEP A) 49.1 vs. 51.1
• EUR Euro-Zone Industrial New Orders (YoY) (JUL) -2.1% vs. -1.1%
• GBP CBI Trends Selling Prices (SEP) n/a

Event Risk on Tap

• USD Continuing Claims (SEP 10) expected at 3720K
• USD Initial Jobless Claims (SEP 16) expected at 420K
• CAD Retail Sales (MoM) (JUL) expected at -0.3%
• CAD Retail Sales Less Autos (MoM) (JUL) expected at 0.2%
• USD House Price Index (MoM) (JUL) expected at 0.2%
• USD Leading Indicators (AUG) expected at 0.1%

Price Action

• USD/JPY can not hold 76.50
• AUD/USD drops through parity on risk aversion selloff
• GBP/USD below 1.5500 as risk weighed
• EUR/USD 1.3500 holds for now but hovers near that level

Risk FX continued to sell off into the European morning trade  weighed by weaker than expected EU flash PMI readings that showed economic activity at a virtual standstill.  The Aussie broke parity as risk aversion flows and weaker Chinese PMI readings suggested that Asia was not immune from the global slowdown woes. The euro held the 1.3500 level from most of early morning early session trade but finally gave way as we were just about to publish. The unit continues to be pressured from all angles.

The latest flash PMI data readings out of Europe show that business activity in both Services and Manufacturing sectors has slipped into contractionary territory . EU Services PMI printed at 49.1 versus 51.1 eyed while EU Manufacturing PMI came in at 48.4 versus 48.6 forecast as that sector continued to contract for the second month in a row.  This was the lowest reading in PMI data in more than  two years indicating that business activity in the region is grinding to a halt as financial turmoil in the credit markets and slowdown in global demand are beginning to take their toll. The stagnation in the  Eurozone is likely to persist with forward looking components of the survey also showing serious deterioration. The new orders index feel at its steepest rate since July of 2009 according to Markit.

As we wrote earlier, “The latest economic news calls into question the wisdom of ECB’s recent tightening bias and raises the possibility that the central bank may be forced to reverse course on rates once the new President Mario Draghi takes the helm.”  Earlier this week EZ PPI prices showed deflation contracting by -0.3%. Clearly the ECB has erred in its policy of price stability as evidence of inflation is non-existent.  Instead the region now appears to be teetering on the verge of a recession and the central bankers in Frankfurt will need to assume a more accommodative posture which in turn could push the euro lower over the medium term horizon.

After holding off for most of the night the EUR/USD finally broke below the 1.3500 barrier and quickly fell towards 1.3450. The pair remains vulnerable to further downside price action on combination of weak economic data, a relatively restrained Fed  and continuing turmoil in the credit markets. If risk aversion flows accelerate as North America comes on line, the pair will likely test support at 1.3400 as liquidation continues to gather momentum.

Today’s North American calendar carries only jobless claims and LEI data and unless the news surprises to the upside, risk is likely to be under pressure for most US session putting further stress on the euro. 

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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.