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EUR/USD Rallies As Short Covering Kicks In

Last updated 3/10/2009 6:12 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German Trade Balance shrinks further
• French Industrial Production plunges -3.1%
• Chinese CPI falls 1.6% for first time in 6 years
• OIl continues to climb to $47/bbl
• Gold off to $915/oz

Overnight Eco

• GBP BRC Retail Sales Monitor -1.8% vs. 1.1% last
• GBP RICS House Price Balance-78.3% vs. -75.8% called
• AUD NAB Business Confidence -22 vs. -32 last month
• JPY Leading Indicators 77.1% vs. 77.2%
• EUR German Trade Balance lower at 8.3B vs. 10.0B eyed
• EUR German Final CPI 0.6% as exptected
• EUR French Industrial Production -3.1% vs. -0.7% called
• GBP Manufacturing Production -2.9% vs. -1.5%
• GBP Industrial Production -2.6% vs. -1.2%

Event Risk on Tap

• USD IBD/TIPP Economic Optimism expected at 43.0
• USD Wholesale Inventories expected at -1.0%

Price Action

• USD/JPY below 9850 on overall dollar weakness
• AUD/USD takes out 6400 as risk appetite improves
• GBP/USD holds 1.3800 despite horrid IP data
• EUR/USD back above 1.2700 on short covering

EUR/USD rallied today in Asian and early European trade on short covering as failure to break the psychologically key 1.2500 level over the past several days prompted a buying spree despite the fact that economic data from the region continued to paint a bleak picture. On the economic front German trade balance printed at 8.3 Billion euro surplus -  less than the 10.0 Billion number  that the market was expecting -  while French   data showed a deficit of  -4.5 Billion  against forecasts  of -3.0 Billion. As we noted earlier, “Presently ECB forecasts call for contraction rate of -2.5% for the region, but many private analysts believe that  GDP will decline by as much as -5% in Q1 of 2009. Given the disappointing trade data, the private forecasters appear to be more accurate and suggests that the unemployment level likely to rise putting more pressure on EZ officials to increase both monetary and  fiscal stimulus. Thus while the euro may rebound  on short covering dynamics in the near term, the long term economic outlook remains grim and the unit  is likely to retest the 1.2500 level  as more economic data hits the screen in upcoming days.  “

Meanwhile in UK Industrial and Manufacturing production data both missed to the downside printing at -2.9% and -2.6% against estimates of -1.5% and -1.2% respectively.  The news suggests that after a small pause the economic conditions in UK are once again beginning to deteriorate with the decline in the exchange rates having little positive impact on the country’s manufacturing sector. Yet much like the euro, cable was able to shrug off  the news, rebounding off the 1.3800 level after an initial flutter lower.

With little meaningful event risk on the calendar until Thursday’s US Retail Sales, the trade in the currency market  will likely be driven by technical considerations. With equity indices looking to bounce after four relentless weeks of selling risk appetite may trickle back into the FX market and help prop up both euro and cable. Although the overall economic picture remains negative for the two currencies, they have managed to hold key support for now and if equities are able to stage any kind of rally the euro and sterling may follow. But unless fundamentals begin to improve any spike higher is likely to be short lived as the dominant trend remains down.

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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.