Euro Threatens 1.45 as Dow Jones Rallies – What Could Force Break?

Euro Threatens 1.45 as Dow Jones Rallies – What Could Force Break?

Fundamental Forecast for the Euro: Neutral

Another week of pronounced financial volatility produced sharp swings for the Euro/US Dollar exchange rate. Yet the single currency finished almost exactly where it began and continues to trade near multi-month highs. A busy week of event risk and a potentially pivotal US Nonfarm Payrolls report threaten similarly large moves in the week ahead.

Substantial rallies in the Dow Jones Industrial Average should have left the correlated EURUSD higher on the week, but it seems the link between risk sentiment and the euro currency has diminished as of late. In fact, the euro seems mostly decoupled from most major asset classes and has traded in a choppy consolidation pattern since setting multi-year highs in May. EURUSD charts show the pair at the top of an ascending wedge formation since mid-July; the next move could prove pivotal.

For Europe, traders will keep a close eye out for key German Employment figures as well as inflation data. There is also a highly-anticipated speech by European Central Bank President Jean Claude Trichet due Saturday (August 27) that could force moves in key European assets. Concerns over Euro Zone fiscal crises seem to have hit a lull as recent ECB bond purchases sent Spanish and Italian bond yields sharply lower. Yet the single currency zone is hardly out of the woods yet, and markets will keep a close eye out for references to future ECB policy moves.

The future of European Central Bank monetary policy remains a focus as traders increasingly price in ECB interest rate cuts through the coming months. Overnight Index Swaps previously predicted the ECB would raise rates by at least 25 basis points in the coming 12 months. Yet those same instruments now predict at least one rate cut, and the shift removes a key pillar of support for the EUR. It is admittedly surprising to see the Euro remain resilient in the face of monetary and fiscal headwinds. Yet much of the reason for its relative strength remains poor fundamental outlook for the US Dollar and other major counterparts.

To that end, markets will keep an especially close eye on upcoming US Nonfarm Payrolls data and the usual stream of NFP week economic releases. The disappointing trend in US labor figures has heightened speculation that the US Federal Reserve will soon enact the third wave of Quantitative Easing (QE3) measures and hurt the US currency. Yet a highly-anticipated speech by Fed Chairman Ben Bernanke made no reference to imminent policy moves. The US Dollar immediately rallied (EURUSD sold off), but markets quickly reversed and the EURUSD finished higher.

It promises to be another eventful week for the EURUSD. Yet whether the pair will break its multi-month range remains to be seen, and it may be particularly significant to watch EURUSD price action near frequently-tested peaks near $1.4500. – DR

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Euro Rallies to Clear Key Resistance Post Bernanke

USD remains under pressure into Monday Price action favors higher yielding risk correlated assets IMF issues warning on global growth prospects ECB and EC in discussions on new plan for banks Intraday short position taken in Aud/Usd from 1.0630 Jackson Hole has come and gone and after all of the hype, the actual event proved to be somewhat of a let down, with Fed Chair Bernanke leaving the door open for additional stimulus but stopping short of officially committing to a third round of quantitative easing measures. Perhaps the most revealing disclosure from Bernanke was the announcement of the extension of the upcoming FOMC meeting to two days in order to afford room to "to explore a range of tools that could be used to provide additional monetary stimulus.” Still, markets have used the event risk as an opportunity to sell US Dollars across the board, with the buck falling quite sharply on unfavorable yield differentials and a temporary flight back into riskier assets.

We would however, recommend that market participants still proceed with extreme caution as the broader global macro economy remains vulnerable and exposed to additional stress. Most recently, the IMF has come out issuing a warning on the uncertainty of global economic growth, and we believe that this could factor more significantly into price action as the day progresses and investors take more time to digest the fact that nothing has really changed and the prospects for a robust global economic recovery remain exceptionally gloomy.

The European debt crisis has not gone away and while the Euro has taken out some key resistance by 1.4535 on Monday, we still see any additional upside in this currency as limited in favor of a resumption of broader weakness. The latest news to come out of the region revolves around a plan in which the European Commission and ECB are considering the possibility of offering central guarantees on certain types of bank debt, to address concerns that some eurozone banks have been shut out of international money markets. Talk of this plan should certainly not be viewed as a risk positive development; with the proposal only highlighting the fact the local officials are legitimately concerned with the possibility of an interbank credit squeeze.

On the strategy front, we have gone ahead and taken advantage of the latest risk rally which we believe to be fleeting and have established a fresh intraday short position in Aud/Usd at 1.0630 (see below). The economic calendar on Monday is especially light in European trade, with the UK bank holiday contributing to the lightened schedule. It is however worth noting that the only semi-meaningful economic release on the day has come out of Australia with some discouraging new home sales. This should provide additional confirmation for our trade. The North American calendar on the other hand is a good deal busier with things picking up on the front as personal consumption, pending home sales and Dallas Fed manufacturing are all due out.

ECONOMIC CALENDAR

TRADE OF THE DAY

AUD/USD: We have gone ahead and entered a tactical intraday short position in this market with the price rallying back above 1.0600 and into a confluence of resistance in the form of the 50/100-Day SMAs and 61.8% fib retrace off of the major 1.1080-0.9925 move. Despite the impressive rally out from 0.9925, the market is still showing signs of a clear structural shift, with more medium-term and longer-term studies starting to roll over. As such, a lower top is now sought out ideally somewhere in the 1.0600’s ahead of the next major downside extension back towards and eventually below 0.9925. POSITION: SHORT @1.0630 FOR AN OPEN OBJECTIVE; STOP 1.0730. LOOK TO ELIMINATE RISK IF OUT OF MONEY AT NY CLOSE (5PM NY TIME) ON MONDAY.

Written by Joel Kruger, Technical Currency Strategist

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