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Thursday February 17, 2005 - 22:31:44 GMT -

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FXCM: A Bit More Steam Left In The Euro Rally

DailyFX Fundamentals 02-17-05

By Kathy Lien, Chief Strategist of

· A Bit More Steam Left In The Euro Rally
· Dollar Shrugs Off Positive US Data
· Pound Rallies On Strong UK Retail Sales


Over the past week, the euro has rallied 2.7% against the US dollar despite Greenspan’s confirmation that US interest rates will be moving higher. Today, the euro even shrugged off another four year low in US jobless claims and a stronger Philly Fed Survey. With price action diverging from fundamentals, sentiment is still driving market movements. This morning, in our weekly report on the FXCM Speculative Sentiment Index, we wrote that based upon the latest data, there should be more steam left in the euro’s rally. Speculators flipped their positions from net longs to net shorts over the past week, which should have been a strongly contrarian bull signal. However, the problem is that USDCHF long positioning on the other hand is inching towards extreme levels, which suggests that price action in that pair could be topping out. As a result, the diverging reports leads us to believe that the euro still has more room to rally, but gains should be limited to 1.3150. Range trading will most likely be the predominant theme as we continue on the Fed tightening cycle in search of the dollar’s next catalyst. We are convinced that the next leg lower in the dollar will occur once the Fed hints that they are done with raising rates. Right now, the Fed’s intentions are clear, which has leant optimism in the dollar. However, once we get towards “neutral rates,” Fed monetary policy will be once again be more obscure. Neutral rates are predicted by the street to be anywhere between 3-5%. The fact that no one knows what exactly the level of neutral rates is, will then inject more uncertainty into the US dollar and possibly lead to larger trends.


The US dollar is weaker against the Euro and Swiss franc as Greenspan spent the morning being critical of the hedging activities of government sponsored enterprises such as Fannie Mae and Freddie Mac and talking about social security rather than the greenback. Yet it was probably wishful thinking to hope that the always conservative Fed Chairman would give any signal of where we may currently stand on his blueprint for monetary policy. Meanwhile, mixed US economic data did little for the US dollar. Leading indicators fell 0.3%, which was more than the market had anticipated with half of the ten indicators declining. Jobless claims and the Philly Fed Survey on the hand saw sharp gains with claims reported at another 4 year low. Claims have been decreasing for the past four weeks with the four week moving average now falling to 312k. Economists have once again jumped the gun and indicated that the claims are consistent with a non-farm payrolls gain of 200-250k. Given the track record of consensus estimates, this may once again be overly optmistic. Especially since the employment component of the Philly Fed Survey fell to 12.3 from 17, despite the overall index surging from 13.2 to 23.9 in February.


The British pound rallied approximately 100 pips as better than expected retail sales sparked optimism of continued economic expansion in the United Kingdom. Estimated to rise 0.8 percent, sales receipts actually rose 0.9 percent in January as rebounds in department stores and food sales contributed heavily to the data. This recent release is especially optimistic as sales dipped 1 percent in December on sluggish demand in light of a continually tight labor market. On an annualized basis, the overall figure was higher by 3.9 percent. The sudden revitalization of consumer demand has spurred mounting optimism of interest rate considerations in light of the tepid inflationary report issued by Bank of England officials yesterday. With recent economic data pointing to record levels of unemployment, rising earnings and a pickup in industrial output, optimistic retail sales becomes the last piece of evidence in bolstering the notion that for the time being, the British economy is exhibiting continued growth.


The Japanese yen remained relatively consolidated throughout the session as market players anticipated an interest rate announcement by monetary authorities, in the absence of economic data. With government reports suggesting that the world’s second largest economy dipped into a fourth recession, monetary authorities decided to leave the near zero benchmark rate unchanged, meeting overall market expectations. This may ultimately add downward pressure on the currency as traders pare back long yen positions in search of higher returns from alternative currency assets. This notion has been most evident in the recent Commodities Futures Trading Commission COT report. According to speculative positioning by noncommercial entities, long yen contracts plummeted 11,416 while short yen positions rose to a total of 34,088. Subsequently, net short yen positions surged 32 percent in accordance to the Speculative Sentiment Index. Ultimately, clear signs of a reversal in yen bullishness exist until any suggestions of improvement surface in the current economic state. Additionally, the central bank maintained its target reserves available to lenders, as Governor Toshihiko Fukui stated no need for adjustment to current monetary policy. Target reserves are set between 30 and 35 trillion yen.


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