Monday June 27, 2005 - 11:45:15 GMT
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Euro Extends the Bounce off the Lows
“There has been a slight improvement both as regards the business situation and expectations. It is still too early to say the downswing is behind is. But it is pleasing that the downward trend has been for the time being.” so noted Gernot Nerb, an economist at IFO after the survey results rose for the 2nd month in a row after reaching yearly lows in April. The best that can be said about the Euro-zone economy is that it stopped contracting and that may be good enough to rally the euro for now. With the single currency so grossly oversold, even a mild up tick in IFO results was taken positively by the market as the unit is now up almost 200 points from lows set during the Asian session last Friday when it briefly pierced the 1.2000 barrier.
With European economic data stabilizing, market attention is now likely to turn to US economic reports. Traders will focus especially on the FOMC meeting this Thursday and the ISM manufacturing data on Friday. While the 25bp Fed hike to 3.25% is a given, the Fed language will be very carefully scrutinized for any change of tone. If the “measured pace” phrasing remains in the text, the market may conclude that rate hikes will be capped at 3.50% leaving little reason to rally the dollar higher. Also noteworthy will be the ISM report this Friday. Paul McCulley from PIMCO wrote recently that the Fed has never raised rates when ISM declines below the 50% level. With ISM now teetering at 51.4, a move down would only reinforce the notion that US tightening cycle is almost over. Meanwhile, with all of the political turmoil temporarily behind it and business confidence finally firming, the euro could be well set up this week to stage a strong short covering rally.
FX Spot Overnight
- EUR rallies to 2160 as short covering continues
- JPY holds above the 109 figures as oil continues to weigh
- GBP at 8270 with BBA data showing a jump in mortgages
- CHF breaks 2700 but lags euro strength
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