Forex Trader Top 3: EUR/USD Down, U.S. Retail Sales, Inflation-Talk from ECB
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
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1. Short Squeeze Drives EUR/USD Monday Morning
The News
On Sunday evening, the EUR/USD gapped down to open the week at 1.5703, significantly lower that the 1.1513 Friday close. However, as buyers entered the market throughout the session, a significant short-squeeze ensued, with the EUR/USD now trading just below highs.
The Breakdown
The EUR/USD gap lower on Sunday evening was a huge technical event, as the move brought the pair below ascending support of the relative wedge. The news seemed warranted with the weekend G7 alluding to global support for a stronger greenback. However, U.S. dollar bulls were blindsided as the euro commenced a massive rally, which began about 2:00 AM EST.
Consequently, by morning, the euro had retraced all of the gap-lower losses and then some. By 8:00 AM EST this morning, the pair had gained 176 PIPs, staging one of the most dramatic rallies seen in several weeks.
At present, not much seems to be in the way of fresh lows for the U.S. dollar, as Sunday evening likely took all chutzpah out from bull’s sails. If the EUR/USD posts a new high, capitulation could ensue, with the top end of the range sitting in the 1.6250 area.
The Bottom Line
The U.S. dollar is in do-or-die territory. Sunday’s gap down in the EUR/USD added a slight bit of danger to owning the pair long, as for many, a 100-PIP gap-lower open could easily trigger margin calls. However, the 180 PIP recovery has also left bears scratching their heads, most likely exhausted from fighting tape throughout the night.
What this means is the U.S. dollar is getting very close to a longer-term reversal. When a currency begins to act in such an erratic fashion, it means the marketplace is clearly divided. However, erratic trading like that seen Sunday night and early Monday morning can easily produce a pronounced capitulatory move; thus, bears will want to be very careful, should the U.S. dollar print a new low. Wednesday will decide the near-term fate of the EUR/USD, see #3 below for more information.
2. U.S. Retail Sales Edge Higher in March
The News:
In March, retail sales posted a 0.2% gain, on the heels of February’s revised 0.4% decline. Stunningly, sales of automobiles actually rose, which was unexpected given that in the present environment it is believed consumers are pinching pennies and staying away from big ticket discretionary spending.
The Breakdown
To get a true feeling of the retail sales report, we need to look at the year-over-year numbers, instead of the monthly changes. Looking into the report, we see that while auto-sales rose slightly in March, overall sales are down 3.2% year-over-year (YOY). What’s more, the three largest pitfalls within the report are (other than autos) furniture and home furnishing stores (-7.1% YOY), building materials (-6.9% YOY) and clothing (-1.6% YOY).
Sales at gasoline stations were up an eye popping 18.9% year-over-year, the seventh straight month of double-digit gains.
The Bottom Line:
Today’s report didn’t show ‘stunning’ number by any means. However, the slight uptick in March retail sales is better for the economy than a decline and may help buoy the major indexes, which are sitting near critical support of the larger ascending trend. The week’s major news will come from Wednesday’s Consumer Price Index (CPI) and the Beige Book report. Inflation is expected at 0.3%. Within the Beige book, traders will be looking for economy-specific language for FOMC rate cut guidance in the June meeting. The Beige books reports manufacturing conditions in 12 U.S. districts, if language similar to “sluggish, falling, contracting, or (gasp!) recessionary” surfaces, markets may infer a 50-basis point cut in the June meeting, which as of now, would be a surprise.
3. ECB Hawkish Mouths Drive Euro
The News:
The news is: watch the news in the coming weeks for language coming from ECB members regarding Euro Zone inflation. Over the past few months, several members, including Christian Noyer, have made hawkish comments to the press regarding inflation fears looming in the Euro Zone.
The Breakdown:
Looking at the last Euro Zone CPI report on March 14, consumer prices were up 3.3% year over year and well above the ECB’s target inflation rate of 2.0%. Obviously inflation within the Euro Zone is a huge issue and is the main catalyst behind hawkish comments coming from members. The problem is that in terms of controlling inflation, most central banks usually do so by actually lifting rates, not lowering. If the ECB were to hike rates; however, growth would slow in the Euro Zone, while the present credit squeeze could spiral out of control, as liquidity is hampered. What’s more, because oil is prices in U.S. dollars, the fact that the greenback is trading near lows, versus the Euro means that Europe is enjoying cheaper oil, even if it may not quite feel that way. If the ECB were to cut rates, the Euro would weaken, potentially pushing inflation even higher. But if we look into Monday morning’s Euro Zone Industrial Production report, we see why the present moment is clearly a double edged sword. In February, industrial production grew by 0.3%, half of the January number. Contraction in the manufacturing of non-durable consumer goods was the main suspect in the report’s month-over-month declines and does not bode well for domestic manufacturers of foodstuffs. Clearly rising input prices (like grain commodities) are taking a toll on both domestic manufacturing and inflation. Clearly, the ECB has its hands tied.
The next Euro Zone CPI report will be released on Wednesday, April 16. If the CPI report shows a dramatic decline in inflation, the Euro could quickly lose momentum, as the market infers the ECB will have room for a rate cut. However, should CPI come in at 3.2%, or higher, the euro could post a new high against the dollar, as traders realize that the EBC won’t be cutting rates anytime soon….
The Bottom Line:
Again, it all comes down to elevated commodity prices as the catalyst for global problems. Rising input prices are slowing domestic manufacturing in the Euro Zone, while also triggering elevated inflation. Until all countries remove protectionist tariff policies, expect the situation to continue.
In the coming days, keep an eye out for headlines holding comments from ECB members for some guidance on the future of rates. What’s more, the CPI report will move the EUR/USD this week, as inflation is the present key to the market.