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Euro Drops Through 1.3000 on Lackluster GE Auction

Last updated 1/4/2012 6:26 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German 10 year auction lackluster selling only 4B out 5B
• UK housing data bit better
• Nikkei up 1.24% Europe lower by 0.20%
• Oil at $102.50/bbl
• Gold above $1600/oz.

Overnight Eco

• EUR PMI Services (DEC F) 48.8
• GBP Net Lending Sec. on Dwellings (NOV) 1.0B vs. 1.0B
• GBP Mortgage Approvals (NOV) 53K vs. 53K
• GBP PMI Construction (DEC) 53.2 vs. 51.8

Event Risk on Tap

• USD MBA Mortgage Applications (DEC 30)
• USD Factory Orders (NOV)

Price Action

• USD/JPY drifting towards 76.60
• AUD/USD holds near 1.0350
• GBP/USD better construction PMI helps keep it at 1.5650
• EUR/USD drops through 1.3000 post auction

Risk FX was slightly lower in mid-morning European trade after the region’s banking sector was under pressure in the wake of large rights offering by Unicredit. Unicredit issued fresh shares at 40% discount to market price and opened 8% lower, dampening investor sentiment. Meanwhile the German government was able to auction off 10 year bonds at an average yield of 1.94%. The results of the auction were better than the time prior with bid to cover ratio rising to 1.3 from 1.1 but overall it was hardly a strong vote of confidence as investors in the region remain cautious with German authorities selling only 4.057 Billion euros out of the target of 5 Billion.

The news sent the EUR/USD towards the 1.3000 barrier in the aftermath of the auction as yesterday’s optimism over the economic data gave way to renewed concern over the sovereign debt issues in Europe, but the pair held that level for the time being. The EUR/USD is trapped within a very narrow 1.2900-1.3100 range with buyers and sellers at both ends of the spectrum as markets lack conviction either way.

On the economic front the EU calendar was very light latest CPI data showing a deceleration in price pressures to 2.8% from 3.0% the month prior. The final services PMI reading for the region printed at 48.8 versus 48.3 eyed with German PMI report coming in above the key 50 boom/bust level. Although this was the fourth month of contraction for the index it was also the second consecutive month of improved performance suggesting that the EZ economy may have faced its worst moments in Q4 of last year and may now be starting to recover towards expansion once again.  

The better than expected economic data along with deep skew in positioning on the short side are the two primary reasons for a possible euro bounce and if the pair can hold support at the 1.3000 level today it may try to mount another run at the 1.3100 figure within the next few days.

In UK the data was also mildly positive with Construction PMI printing at 53.2 versus 51.8 with all three subcomponents - housing, commercial and civil engineering - reporting positive growth for the first time since March 2011. The employment index increased slightly to 52.7, from 52.2, with higher new orders and output as the main factors driving the increase in staffing levels. This is the second positive UK PMI reading this month and market will now focus on the important services PMI due Thursday. If that report can surprise to the upside as well cable may stage a rally towards the 1.5700 barrier as sentiment regarding the UK economy improves. 

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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.