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Euro Benefits From Risk On Ahead of North American Trade

Last updated 1/31/2012 5:37 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German labor data hits record low
• UK consumer lending at worst level since 1993
• Nikkei 0.11% Europe up 0.92%
• Oil at $99.79/bbl
• Gold at $1744/oz.

Overnight Eco

• AUD NAB Business Conditions (Dec) 3 vs. 2
• AUD Private Sector Credit (MoM) (Dec) 0.3% vs. 0.3%
• JPY Unemployment Rate (Dec) 4.6% vs. 4.5%
• NZD Building Permits s.a. (MoM) (Dec) 2.1% vs. 6.2%
• EUR German Unemployment Change (Dec) -34K vs. -8K
• EUR German Unemployment Rate s.a. (Dec) 6.&% vs. 6.8%
• EUR EU Unemployment Rate (Dec)
• GBP Net Lending 0.4B vs. 1.2B

Event Risk on Tap

• USD Chicago Purchasing Managers' Index (Jan) expected at 63.3
• USD Consumer Confidence (Jan) expected at 68.0
• CAD Gross Domestic Product (MoM) (Nov) expected at 0.2%
• CAD Raw Material Price Index (Dec) expected at 3.9%

Price Action

• USD/JPY stabilizes at 76.25
• AUD/USD rallies towards 1.0700
• GBP/USD stalls at 1.5750 as weak lending data weighs
• EUR/USD takes out 1.3200 on better risk flows

Risk FX rose steadily through Asian and early European trade today boosted by better economic data out of Germany, the news of agreement on a fiscal compact by EU, continuing negotiations on Greece  and end of the month flows against the dollar. German labor data surprised to the upside as Europe’s largest economy defied skeptics by reducing its jobless rolls by -34K versus -8K eyed. The unemployment rate dropped to 6.7% versus 6.8% forecast – its lowest level on record since re-unification.

The news bodes well for German growth in H1 of this year as stronger employment data will no doubt help fuel both business and consumer confidence and will provide a strong fiscal foundation as the country grapples with the ongoing sovereign debt crisis in the region. Nevertheless the consumer in Germany remains cautious with Retail Sales during the Christmas season contracting sharply by -1.4% versus expectations of 0.9% rise. However, as job rolls expand the natural increase in income should help German GDP growth in H1 of 2012  and serve as an engine of growth for the rest of the EU.

The data out of the UK was not nearly as sanguine as consumer credit contracted  to 0.4B versus 1.2B eyed. This was the worst reading since 1993 and serves as a harsh reminder of the impact of the fiscal austerity measures undertaken by the UK government. The news today escalates the probability of additional QE by the BOE in the foreseeable as UK central bankers attempt to reverse the credit contraction in the economy. 

Cable drifted to 1.5750 in the aftermath of the release, but has help support at that level as risk flows proved positive.  Nevertheless, the unit may find further gains more difficult to come, especially if economic data over the next several days continues to confirm  a UK economic slowdown and traders start to position for more dovish policy turn by the BOE.

In North America today the focus turns to Chicago PMI data with markets anticipating an increase to 63.1 from 62.5 the month prior. If the data could surprise to the upside it could offer a further boost to risk and perhaps help propel the EUR/USD through year to date highs at 1.3225 set last Friday. Any rally in the pair continues to be restrained due to the uncertainty regarding the resolution of Greek debt. However, with Greek PM Papademos stating that, "Significant progress has been made in talks about private sector involvement, We are seeking to conclude negotiations with the troika by the end of the week," concerns about a default are starting to ease while the eco data remains supportive, all of which augurs for further rally in 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.