Tuesday June 21, 2005 - 11:22:36 GMT
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Rate Spec Pressures Euro
Despite rebounding from a 6 month low the ZEW Investor confidence survey was little help to euro bulls who witnessed yet another plunge in the currency as the unit broke the 1.2100 level in the European session. The decline was actually precipitated by the surprise 50bp rate cut from the Swedish Central Bank. The market had expected only a 25bp decrease. Although ECB officials continued to issue statements of denial, proclaiming that they continue to pursue a “neutral” stance, the market viewed the Riksbank move as yet another point of pressure on ECB to become more accommodative and lower rates in order to stimulate the moribund EU economy.
As we pointed out in our daily fundamental piece yesterday, we do not believe that ECB will take action unless the economic situation deteriorates drastically. The inflationary implications of $60/bbl oil will contain any urge to loosen monetary policy and tonight’s report of 3.1% year over year increase in EU Labor costs serves as a reminder that inflationary pressures remain within the EZ region despite anemic economic growth. More importantly, the near 10% decline in the euro since its all time highs will have a naturally stimulative effect on the EU economy without the need for a rate cut. Although recent sentiment in the currency market towards the euro has been nothing short of horrible we direct your attention to the DAX index which since May 17th has had a near vertical rise of 400 points or approximately a 9% gain. If the German stick market is correct in anticipating a recovery in EZ’s largest economy, then further declines in the euro are likely to be capped. Undoubtedly, euro bears will try to test the important 1.2000 barrier where apparently many exotic and plain vanilla options reside. Nevertheless, the downtrend in the euro, which according to our proprietary trend indicator lasted for 42 straight days before Friday’s brief interruption, is likely nearing an end.
FX Spot Overnight
- EUR tests the 2080 level after Riksbank surprise cut
- JPY frozen at 109.30 as oil restrains buyers
- GBP breaks the 8200 barrier on euro weakness
- CHF trades relatively stronger on better Trade Data
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