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Breakouts All Over? Euro Drops Through1.2500 USD/JPY Above 99.00

Last updated 3/4/2009 6:10 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Shanghai up 6% on expected stimulus package
• Australian GDP misses by a mile sending dollar sharply higher accross the board
• Equites firmer in Euroep and Asia
• Oil at $42/bbl
• Gold continues to slide to $917/oz $900 next?

Overnight Eco

• AUD AIG Services Index 32.2 vs. 41.0 last weak accross the board
• GBP Nationawide Consumer Confidence better at 43 vs. 38 expected
• EUR Final Services PMI 39.2 better than 38.9 forecast
• GBP Services PMI 43.2 against 41.6
• GBP BRC Shop Price Index 1.9% higher than 1.1% last

Event Risk on Tap

• USD Challenger Job Cuts
• USD ADP Non-Farm Employment Change expected at -585K
• USD ISM Non-Manufacturing PMI expected at 41.2

Price Action

• USD/JPY runs higher in dollar sterngth taking out 98.50 in Asia
• AUD/USD plunges to 6350 after horrid GDP data reversing yesterday's gains
• GBP/USD trades to 1.4100 as PMI Services surprises to the upside
• EUR/USD takes out 1.2500 support in Asia but recovers the figure in Europe on better PMI

EUR/USD broke the psychologically important 1.2500 level in early Asian trade after a much worse than expected Australian GDP report triggered a broad dollar rally and tripped stops  taking the pair to 1.2457 before it recovered above the 1.2500 handle in early European trade.  USD/JPY also saw a tremendous amount of flow taking out the 99.00 barrier and now appears to be poised to tackle the 100 level within the next few sessions.

As we wrote earlier today, “Although the move in the currency market was much more technical rather than fundamental in nature the underlying economic problems continue to weigh on the single currency as labor markets across the region continue to convulse. Spanish unemployment has risen to a 13 year high as 3.5 million workers  now find themselves out of a job while German companies are about to put another 1.5 million workers on shortened hours.

The fall of in wage income will no doubt further exacerbate the economic contraction in the European Union and so far any attempts at stimulus by the region’s fiscal authorities have been fragmented and ineffective. The EUR/USD now finds itself near the spike lows set last October and November and 1.2333 will serve as the key support level over the next several sessions. For the time being the flow in FX remains firmly in the hands of dollar bulls, but the pair is now approaching oversold levels  and could quickly shoot up on any renewed market concerns regarding  the US financing issues. In short, the trade remains to the downside, but caution is the order of the day. “

Meanwhile in UK the surprise bounce in PMI service report which printed at 43.2 vs. 41.6 forecast, put a bid into the beleaguered pound which has suffered through a series of selling waves this week after very weak Manufacturing and Construction numbers.  The slight improvement in the services reading hardly heralds a turn for the better, but it may indicate that  some signs of a bottom are in place. So for that matter does the price action in sterling itself which has tested support near the 1.3950 level thrice  this week only to rebound each time.

Tomorrow’s  BoE decision and any accompanying statement will be crucial to the near term direction in the pair. Any specific talk of quantitative easing could produce yet another round of selling and if 1.3950 gives way a retest of the 1.3500 lows is possible. On the other hand, the price action in cable is showing  signs of bottoming out and with today supportive fundamentals behind it, the pound may have now finally stabilized at the 1.4000 level.     

In North America today, the key event risk is the ISM Non Manufacturing report which is projected to slip to 41.2 vs. 42.9. With market already anticipating  a miserable result we doubt that any negative read will have much sustained impact on trade. On the other hand, should the data print to the upside it could serve as just the right catalyst to take stocks higher and carry USD/JPY towards the 100 level before the end of the day.

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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.