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Can EUR/USD Break 1.3700?

Last updated 9/29/2011 4:59 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro rallies on hopes of EFSF vote in Budestag
• German unemployment reduced markedly -26K vs. -9K
• Nikkei up 0.99% Europe flat
• Oil at $82/bbl
• Gold at $1635/oz.

Overnight Eco

• JPY Retail Trade (YoY) (AUG) -2.6% vs. -0.6%
• EUR Germany Unemployment Rate s.a. (Sep) -26K vs. -9K
• GBP UK Net Lending to Individuals 1.0B vs. 0.8B

Event Risk on Tap

• USD Gross Domestic Product (Annualized) (2Q T)
• USD Personal Consumption (2Q T)
• USD Gross Domestic Product Price Index (2Q T)
• USD Initial Jobless Claims (SEP 23)
• USD Continuing Claims (SEP 17) (SEP 17)
• USD Pending Home Sales (MoM) (AUG)

Price Action

• USD/JPY steady at 76.50
• AUD/USD recovers for more than 150 off lows as risk rallies
• GBP/USD back to 1.5700
• EUR/USD targets 1.3700 after strong GE employment data and hopes for EFSF vote

A big reversal night for risk FX as EUR/USD was lifted off its Asian session lows on investor optimism over the German Parliament vote on EFSF and better than expected labor data out Germany. Earlier in Asia EUR/USD was driven lower by risk aversion flows as US equity markets ended near their lows, and the pair looked like it was going to break the 1.3500 figure at the start of Tokyo open. 

However, the pair found support and staged a strong turnaround breaking above the 1.3600 level as markets anticipated strong majority support from the German lawmakers. Markets expect Angela Merkel’s ruling coalition to support the measure to expand the EFSF with many of the left of center opposition members joining the vote. 

As we noted earlier, “Today’s vote in the Budestag while going a long way towards assuaging those concerns may not be enough to propel the euro beyond those recent range parameters.  As we noted earlier, the currency markets will need to see further reassurance on Greece before EUR/USD can stage a more meaningful recovery towards the 1.4000 level.  For now the pair looks to target the 1.3700 barrier if EU traders can sustain the optimism from Asian trade.”

On the economic front the euro was also boosted by better than forecast German labor data as the unemployment numbers printed at -26K vs. -9K eyed. The seasonally adjusted unemployment rate dropped to 6.9% from 7.0% the month prior. The news bodes well for German growth in the near term and stands in contrast to the slowdown in PMI data, although the intermediate term risk is that German businesses may have over expanded their payroll just as global demand is starting to dampen.   

In UK both Net lending and mortgage approvals ticked higher beating estimates by bit. Mortgages rose to 52K from 50K forecast while net lending expanded to 1.0B from 0.8B forecast.   The data shows a small willingness to increase credit, but overall the UK consumer remains moribund as stagnant wages and persistent inflation pressures continue to stifle growth. Cable rose to 1.5700 ahead of the news but has since drifted a bit lower on profit taking.

In North American session today the market will get a glimpse of the weekly jobless claims and the final US Q2 GDP figures. The eco news is unlikely to have major impact on trade as we’ll continue to pivot off the developments in Europe. If Ms. Merkel can get a solid backing for the EFSF measure with more than 311 deputies voting for the bill, the EUR/USD could try to run stops at the 1.3700 level, but unless risk flows pick up markedly as the day proceeds any further gains are likely to be limited.

NOTE:  I am off to Australia for the Melbourne investor show, no reports until Oct. 14th

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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.