Ahead of the holiday week-end the EURUSD came under a very heavy bombardment of profit taking as the pair crumbled through the key 1.5500 support level in early European trade.
â€¢ Japanese Yen: back above 100 on pro dollar rally
â€¢ Euro: Drops below 1.5500 as profit taking sets in
â€¢ Pound: Retail Sales blast to the upside
â€¢ Canadian Dollar: International Transactions on tap
â€¢ US Dollar: Philly Fed on tap
Ahead of the holiday week-end the EURUSD came under a very heavy bombardment of profit taking as the pair crumbled through the key 1.5500 support level in early European trade. The unwind of the recent rally to 1.5900 was initially trigged by sharp decline in the price if gold during the Asia session and the selling pressure continued through the London open as both long term players and short term specs all dumped their long euro positions.
One possible reason for euroâ€™s sudden weakness is the growing body of evidence that EZ economy is beginning to slow down. Yesterdayâ€™s worst trade deficit in a decade and todayâ€™s lower than expected PMI services readings suggest that the high exchange rate and the collapse of demand in US are finally starting to impact EZ businesses. Should the situation worsen, talk will turn to the possibility of an ECB rate cut sometime in Q2 of this year.
The euro has been the biggest beneficiary of dollarâ€™s weakness over the past several months as interest rate spread between the two currencies has continued to widen. With the Fed lowering rates by another 75bp on Tuesday, the spread now stands at 175bp. However, should the market sense a slowdown in EZ growth, it will begin to discount ECB easing and euroâ€™s relentless climb against the dollar may come to an end.
Meanwhile in UK, the economic news was decidedly more positive, as Retail Sales jumped 1.0% from â€“0.1% expected on stronger sales of clothing. Far from curling up, the UK consumer appear to be alive and well. That news should keep the BoE relatively hawkish, suggesting that at best the UK central bank will only lower rates by 25bp rather than 50bp. As a result EURGBP which hit yet another record high yesterday of 7914, dropped to 7815 in the aftermath of the release. Unless financial markets see another cataclysmic event in the near future and the pound comes in for another wave of selling, the pair should continue to trade down working off its grossly overbought condition.
Will G-7 Authorities intervene if dollar drops further? Join us in EURUSD Forum
To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]