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Wednesday June 22, 2005 - 21:02:50 GMT

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Forex: Will the Euro Ever Break 1.20 or 1.23?

DailyFX Fundamentals 06-22-05

By Kathy Lien, Chief Strategist of

· Will the Euro Ever Break 1.20 or 1.23?
· Pound Slides With UK On Rate Cut Watch
· Focus On China As Greenspan and Snow Testify On US-China Relations

US Dollar - The market has been exceptionally quiet today with dealers snoring at their desks as an empty US calendar makes us wonder if the EURUSD will ever break 1.20 on the downside and 1.23 on the upside. Yesterday was the first day of summer and summer season tends to be one of the quietest times in the FX market next to the week between Christmas and New Years where you can literally hear a pin drop. Yet before rushing to pack your bags for a summer hiatus, you may not want to spend this year’s vacation season just lounging on the beach – because you could miss some exciting developments. We have a lot of interesting things going on that could definitely make this a fun summer. July is when the UK is slated to take over the EU Presidency and we can’t wait to see how Blair’s camp tries to fix things because this time, they are held accountable. Here in the US, the end of Fed’s interest rate hikes and the pending departure of Greenspan are two major developments that are blowing the storm our way and the market could become fixated on them at any point in time. Over in Asia, Chinese revaluation still remains a very big issue that the market hasn’t forgotten about. Globally, oil prices will keep everyone on their toes as we wonder if we will ever see oil prices back at $40 a barrel. Traders use to say that $40 was resistance in oil, but now we would be lucky if we even see $40 as support. Higher oil prices take a big bite out of consumer spending and will force most central banks to be more vigilant with monetary policy than may be otherwise needed. Though we haven’t seen it yet, it could very well cause a global slowdown, much like the one we saw at the end of last year. Tomorrow, we have jobless claims and existing home sales, but the most important event will actually be Greenspan and Snow’s testimony on US-China economic relations. Yuan revaluation talk is back on our radar screens with China agreeing to attend the G8 Summit. Last month, Snow was predicting a move by China over the next few months and he will probably continue to do so while at the same time pushing the Administration’s agenda of exerting pressure on China to revalue. He may even threaten once again that if China does not make any changes, they may be branded as a currency manipulator, which could lead to economic sanctions. Greenspan has also called for China to revalue, but he does not believe that it will be the solution to the US’ woes. Particularly, he does not believe that the trade deficit will really shrink that much just based upon Chinese revaluation, which comes in stark contrast to the claims made by Congress. It will be interesting to see if our calm and collected Chairman will spend most of the testimony tempering the bolder and harsher words that we are use to hearing from the Treasury Secretary.

Euro - Will they or will they not cut rates continues to be the main question in the minds of Euro traders. Yesterday they looked to the move by Sweden’s Riksbank and tooted their horn at a more compelling reason for the ECB to lower rates. Today, they looked at the shift in stances in the Bank of England’s Monetary Policy Committee and became even more excited about the possibilities of the ECB following suit. There was even an article quoting an unnamed source in a subscription news publication that claims that the ECB may have discussed a rate cut. With everyone calling for them to cut rates, it is no surprise and hardly brain surgery to guess that they did discuss lowering rates and weighing the options. Yet the conclusion is the same and that is they are still adamantly against a rate cut. We said yesterday that with oil prices up 29% from last month’s low, and the EURUSD 7% lower, inflation is back on the radar screens of the central bank. Not only is the euro no longer offsetting some of the inflationary pressures of rising oil prices, but on the flip side, there are also signs that the weaker euro is actually helping the battered Eurozone economy. Eurozone Industrial orders came in much better than expected in April, providing more cause for optimism. The longer the euro remains at these levels, the longer the Eurozone will benefit from the stimulus.

British Pound - The big news in the market today was the minutes from the latest Bank of England’s Monetary Policy meeting. You can either call the central bank fickle or dynamic, but the sudden shift in policy sentiment caught the market by surprise. Most analysts had expected the policymakers to unanimously vote to keep rates unchanged and policy neutral but traders were presented with a 7-2 vote instead, with the 2 dissenters favoring a rate cut. Citing unfavorable levels of consumer spending and a potential slowdown in economic growth, BoE Chief Economist Charlie Bean and outgoing MPC member Marian Bell voted in favor of a 25bp cut. As a result, further speculation mounts on expectations that policy makers will indeed consider cutting rates as early as August or even July. However, central bankers remain wary of the consumer credit situation as well as higher energy prices and agreed that confirmation of a slowdown in individual spending would be needed.

Japanese Yen - Retracing all of yesterday’s gain, the yen fell on depressing trade balance data as particular components of the figure were suggestive of waning foreign global demand, notably in China. The resultant figure was far less than consensus estimates, 43% lower, and highlighted the dependency of the export market in the world’s second largest economy as import demand bounced. Additionally lending to the lower trade surplus were high oil prices, creating higher import costs and further depressing export demand. Comparatively, with trade considerably sluggish with China, the report cited an improvement in Taiwanese relations. Vaulting almost 16% higher, the jump reflected an increase in supply for IT product lines. As a result, with the export market considerably soft and no expected evidence of a reversal in the near term, the recovery of the economy may very well be in jeopardy. Ultimately, even with recently positive sentiment stemming from the government and private sector sources, traders will turn to tomorrow’s service sector report in warranting any brighter side optimism.


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