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Euro Struggles For A Foothold - Is 1.2500 Next?

Last updated 2/17/2009 5:42 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Moody's threatens to downgrade European banks on exposure to Eastern Europe
• Japanese Finance Minister Nakagawa resigns after G7 gaffe
• Equities lower in Asia and early Europe
• OIl quite at $37/bbl
• Gold runs higher to $966/oz.

Overnight Eco

• JPY Tertiary Industry Activity -1.6% as expected
• AUD Monetary Policy Meeting Minutes
• CHF Retail Sales better at 3.6% vs. 2.0%
• GBP CPI hotter at 3.0% vs. 2.0%
• GBP DCLG HPI -10.2% vs. 10.2% expected
• GBP RPI 0.1% vs. -0.1%
• EUR German ZEW Economic Sentiment -5.8 vs. -26.5
• EUR Trade Balance better at -0.3B vs -5.2B

Event Risk on Tap

• USD Empire State Manufacturing Index expected at -22.5
• USD TIC Long-Term Purchases
• USD NAHB Housing Market Index expected at 8

Price Action

• USD/JPY gives up early Asia gains trading below 9200 as risk aversion returns
• AUD/USD sells off to below 6400 on overall dollar strength
• GBP/USD recovers top well above 1.4200 after hot CPI data
• EUR/USD finds a base at 1.2600 after heavy sellign in Asia as eco news helps

A flurry of sell activity in early Asia trade sent the EUR/USD tumbling to a two month low as currency traders became increasingly concerned about the exposure of European financial institutions to the troubled assets in Eastern Europe. Last night Moody’s threatened to downgrade those  European banks with large portfolio exposure to Central and Eastern Europe. According to Bloomberg, banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of western European bank loans in Eastern Europe.  

However as the night progressed the EUR/USD stabilized and by morning European trade  had managed to rise above the 1.2650 level after the ZEW survey data printed far better than forecast.  The ZEW survey showed an improvement to -5.8 against expectations of -26.5 and last months reading of -30.8. Analysts attributed the surge in optimism to fiscal stimulus plans put in place by various member nations. Another welcome  piece of news came from the Trade Balance numbers which showed a much smaller deficit of -0.3B against -5.2B forecast.

Still despite the first shred of positive economic news in weeks, the euro  struggled to find a foothold as worries over the viability of the currency continue to dog the unit.  The structural issues facing the Eurozone have grown considerably more serious over the past few days with the region now facing financial troubles from its member nations such as Ireland as well as looking at the prospect of possibly massive loan losses on its Eastern European portfolio.  

One of euro’s inherent strengthss over the greenback was its strong balance sheet structure. With Current Account surpluses and strict budget deficit rules, the EZ always appeared to be fiscally stronger than the US.  The latest news however, suggests that the region may be more financially troubled than even the US economy which is struggling with the after effects of massive credit bubble burst. To that end the euro remains vulnerable to  the downside  should the credit conditions deteriorate further.

In the near term  however, the pair may find a modicum of support given the relatively positive economic data overnight, Nevertheless much of its recovery will be driven by US equity flows later on in the day. If risk appetite comes back the EUR/USD could get a lift back to the 1.2700 level as short covering kicks in. However, should investor sentiment turn ugly once again the 1.2500 figure will quickly come into view.

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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.