EUR/USD finally breaks this key level

After multiple attempts last week,
the EUR/USD finally broke the 1.2000 barrier
in early Asian trade and
has been on the defensive for most of the European session. With political
situation in Germany still unresolved and US economic data decidedly better than
expected the market may now begin pricing in the possibility of 4.5% US rates by
the beginning of next year. Such a wide interest rate differential between the
greenback and the majors should keep the unit well bid for the time being.

Last week, several key US releases including Durable Goods
which printed at 3.3% versus 0.7% expected and Chicago PMI which recovered the
50 boom/bust handle in a very decisive manner by posting 60.5 reading,
contributed heavily to create a dollar friendly environment. The data indicates
that the negative post Katrina effects on the US economy have been negligible so
far. How long can US consumer demand maintain its pace in the face of rising
rates and $3/gallon gas remains to be seen, but until shown differently, the
market is offering the benefit of the doubt to dollar bulls.

Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report