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Sentiment Begins To Shift In Euro, Signaling a Possible Bottom

Daily Forex Fundamentals 01-21-05

By Kathy Lien, Chief Strategist of

· Sentiment Begins To Shift In Euro, Signaling a Possible Bottom
· Dollar Slides As Consumer Confidence Weakens
· Pound Rallies Despite Shockingly Weak Retail Sales


The euro has finally managed to gain strength against the dollar after declining for seven consecutive trading sessions. It has been a great week for the greenback with impressive jobless claims, a sharp surge in foreign purchases of US dollar denominated assets, news of repatriation by major corporations and increasingly hawkish comments by Federal Reserve Presidents. With FOMC members rushing to give the market their view on the US economy, inflation and monetary policy before the quiet period ahead of the February 2nd monetary policy meeting, the market has been paying particular attention to any hints of more aggressive action. Optimism for most of this week was spurred by the possibility of the removal of the word “measured” from the FOMC statement in the near future. However today, an article in Business Week magazine suggested otherwise, causing the dollar to give back some of its recent gains. The article cites that even though some Fed Presidents see inflation risk, the Chairman himself (Greenspan) is not worried and “isn’t likely to shift gears.” It is commonly speculated that Greenspan has the final say on changes to the FOMC statement. Meanwhile, FXCM’s Speculative Sentiment index moved into net short territory for the EURUSD today, signaling a possible bottom. This coincides with the 61% drop in net long positioning for euro contracts on the IMM.


The dollar has given back some of its spectacular gains against the Swiss franc this week. As pre-signaled by yesterday’s ABC consumer confidence index, confidence as measured by the University of Michigan Sentiment survey deteriorated in the month of January due to falling stock prices and higher oil prices. Economic data next week is light, though we are expecting 3 key releases – consumer confidence, durable goods and final fourth quarter GDP. The market is already and will continue to look to the first week of February for clearer guidance on market direction. Aside from the Federal Reserve Rate decision, the G7 finance ministers meeting will also be conducted the first weekend in February. The market has put significant weight on the possibility of major announcement at the meeting. However, in our opinion, the results should be rather benign and the market will once again, be disappointed. Oil prices have also accelerated for the first time in 3 days, back towards $50 per barrel. A break above $50 could return the dollar to its previous downtrend.


The British pound ended the week higher despite a significantly weaker retail sales report. To the surprise of many, it is now apparent that Bank of England Governor King was actually warning yesterday about a possible deterioration in the report. If you recall, yesterday he had cautioned against placing too much significance on one month worth of data. Retail sales fell 1.0%, compared to the market’s forecast for it to accelerate by 0.3% in what is traditionally a strong month for spending. The report indicates that discounts on clothing and other retail stores has done little to spur spending, prompting the worst Christmas shopping season since 1981. Once again though, this has a minimal impact on monetary policy. The Bank of England will continue to keep interest rate unchanged at 4.75%. However, if data continues to deteriorate, we expect more Monetary Policy Committee members to bring up the need for a rate cut. If such sentiment is publicized, the pound could undergo another beating. For the time being though, the pound will continue to be thrown around by the dollar.


The Yen made an impressive gain today, trading well below 103 once again. Although there were no major data releases today in Japan, the disappointing US consumer confidence data resulted in a downward movement in the dollar. Also, after moving across the 103.50 point today shortly after the US data was released, dollar bears probably felt that whatever strength the dollar had displayed was unjustified and the pair began a slide down to 102.71 over the next few hours. There is also apprehension in the market regarding the G7 meeting, taking place in London 2 weeks from now. In recent weeks, there’ve been pleas from European officials calling for more flexibility in the Asian currencies to absorb more of the depreciation in the dollar. This type of sentiment is expected to become a main topic of the summit as well. Although Japan’s threats of yen-weakening intervention are beginning to resemble a broken record, the Asian countries are still expected to put up a good fight on this issue. Japan’s recovery has been and will, for some time, continue to be led on export strength so they are not yet ready to let go of the price competitiveness that their exchange rate is affording them.


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