Monday October 11, 2004 - 11:10:18 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro faces tough barrier
The weak US employment report will undermine dollar sentiment, especially as it will increase doubts over fourth-quarter growth. There will also be further speculation that the Fed will not increase rates above 2.0%. High oil prices will also tend to dampen US growth expectations and the net impact is likely to be dollar negative. The Euro will attract momentum buyers if it can force a move higher, but the Euro will still face barriers to further gains, especially with a very high number of long speculative Euro positions.
The dollar was undermined by the weak US employment report and weakened to a low of 1.2435 on Friday in New York before consolidating around 1.2410 in early Europe on Monday.
The September US payroll increase was lower than expected at 96,000 compared with expectations of a 148,000 increase and the August increase was also revised down to 128,000. There is the risk of greater speculation that the US Federal Reserve will not raise interest rates above 2.0% and markets will also speculate that the Fed may not increase rates in November if forthcoming data is disappointing. Currently, markets are pricing in an 85% chance of a November hike and if this dips below 50%, the dollar will be vulnerable to increased selling pressure.
There will also be further concerns that the US economy will be undermined by high oil prices and this will tend to increase underlying dollar vulnerability. The 1.2450-1.25 region will be crucial for near-term market trends. If the Euro can break above this level, there is the potential for more aggressive dollar selling, fuelled by momentum plays.
The latest IMM data recorded an increase in long Euro positions of over 12,000 in the latest week. The long Euro position is now close to 45,000 contracts. This is a very high number of contracts and this fairly extreme positioning will make it difficult for the Euro to extend gains. A shift in longer-term sentiment is, therefore, likely to be essential to trigger further substantial dollar losses.
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