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EUR/USD Break Below 1.3700 As Doubts on Summit Multiply

Last updated 10/18/2011 5:44 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese GDP misses at 9.1% vs, 9.3% eyed
• UK CPI matches highest ever recorded
• Nikkei off -1.55% Europe - 1.89%
• Oil at $85.80/bbl
• Gold at $1665/oz.

Overnight Eco

• EUR Euro-Zone ZEW Survey (Economic Sentiment) (OCT)
• EUR German ZEW Survey (Economic Sentiment) (OCT)
• EUR German ZEW Survey (Current Situation) (OCT)
• GBP Consumer Price Index (MoM) (SEP) 0.6% vs. 0.4%
• GBP Core Consumer Price Index (YoY) (SEP) 5.2% vs. 4.9%
• GBP Retail Price Index (YoY) (SEP) 5.6% vs. 5.5%
• GBP Retail Price Index (MoM) (SEP) 0.8% vs. 0.7%

Event Risk on Tap

• USD Producer Price Index (YoY) (SEP) expected at 6.4%
• USD Producer Price Index Ex Food & Energy (YoY) (SEP) expected at 2.3%
• USD Producer Price Index (MoM) (SEP) expected at 0.2%
• USD Producer Price Index Ex Food & Energy (MoM) (SEP) expected at 0.2%
• USD Net Long-term TIC Flows (AUG) expected at $27.8B

Price Action

• USD/JPY below 77.00 as risk flow fades
• AUD/USD drops to 1.1050 on weak China news
• GBP/USD hot CPI drops it to 1.5710 before small bounce back
• EUR/USD drops through 1.3700 as worries over France weigh

The risk rally is definitely running out of steam as high beta currencies ran into their second straight day of liquidation sparked by weaker than expected GDP readings from China and continuing uncertainty over the efficacy of policy solutions that will be presented at upcoming EU summit on the sovereign debt crisis. The EUR/USD dropped through the 1.3700 level as enthusiasm began to wane over possibility that EU officials will be able to produce a comprehensive plan to resolve the region's credit problems.

The  task of creating an effective EFSF fund that could act as defacto European Treasury could become even more complicated if France’s credit deteriorates further. The spread between French and German bonds has widened to a record high of 95 basis points as credit markets are becoming increasingly concerned about the country’s balance sheet. Overnight Moody’s warned that it may put a negative outlook on France's Aaa credit rating in the next three months if the costs for helping to bail out banks and other euro zone members stretch its budget.         

On the economic front the euro wasn’t helped by the weak ZEW reading which printed at -48.3 vs. -44.7 as investors continued to worry that the slowdown in German economic activity could lead to a contraction by the year end. Recent German PMI data has already signaled contraction and if this Friday’s IFO number confirms the downward bias, sentiment could  turn very negative as traders will quickly realize that markets are relying on Germany to back stop the Eurozone just at the time as the country’s economy slides into a recession.

In UK the CPI data was hotter than expected printing at 5.2% versus 4.9% eyed as it matched the high on the record. The news must be vexing to the BOE officials as it limits their ability to stimulate the economy further by expanding QE beyond the current levels. It also bodes badly for growth going forward as it immediately cuts real consumer spending by 3% given the paltry 2% growth in UK wages. Cable dropped to 1.5700 on the news as hotter inflation at the time of slow growth is viewed negatively for the currency raising the specter of stagflation.

In North America today the calendar carries PPI data and the TICs report. Markets anticipate a small pickup in inflation on the wholesale level and a improvement in capital flows. The economic news however is likely to have only a fleeting impact on trade as focus remains firmly on Europe and on equity flows.  Yesterday’s disappointment  by IBM may weigh on stocks at the open and shorts could try to test the 1.3650 level in EUR/USD which represents the 200 SMA. A break below that area could trigger a steeper selloff turning sentiment progressively more negative as hopes for a structural solution to EZ debt issues continue to fade. 

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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.