Has the EUR/USD reached a bottom?
US Dollar
The dollar is rolling over and as always, it is the Fed’s
fault. The market was already reeling from the hawkish comments from ECB
officials over the past few days and yesterday, the sell-off in the dollar
deepened when some Federal Reserve members warned against going too far with
rates during their November 1st meeting.
The Fed also believes that the rate language has to be changed
before long, even though they think that inflationary risks are still prevalent
and that the economy continues to perform well post Hurricane. We do not expect
these debates to deter the Fed from raising rates in December and January, but
we do expect changes to the FOMC statement that will make it much more neutral.
According to Bloomberg, after the release of the FOMC minutes, the probability
of an April rate hike to 4.75 percent fell from 58 percent to 34 percent.
Oil prices are also back on the rise with a cold snap hitting
the Northeast. We knew that it wouldn’t be long before oil prices begin to
climb. There is even word that we could see some snow over the Thanksgiving
holiday. The Conference Board reported yesterday that they expect a weaker
holiday season compared to last year. With energy companies having already
announced price increases for the winter season, we think that the average
consumer may think twice about handing out Sony PSPs and iPods this Christmas.
Today tends to be a shortened trading day with most dealers
leaving after lunchtime in NY. We are already beginning to see what could become
a renewed uptrend in December. Yesterday, we talked about how over the past 5
years, aside from 2001, we saw pretty big trending moves in the month of
December, all dollar negative and Euro positive. This will be a point that we
repeat many times over since fundamentals are right now aligning with the EUR/USD’s
historical bias in the month of December.
Euro
The Euro is turning as we are seeing signs of a true bottom.
Not only are we seeing higher lows and higher highs technically, but sentiment
as measured by the FXCM Speculative Sentiment Index has also flipped to net
short, which signals a rally in the EURUSD. On top of that, fundamentals are
beginning to favor the Euro, albeit modestly.
The ECB is getting ready to begin raising interest rates while
the Fed is beginning to contemplate slowing down their rate hikes. Although the
trajectory of rates for both countries is still positive, the expectations that
the Fed might pause or even stop a few months down the line has the markets
worried that thee premium that they have put on the dollar recently may not be
completely warranted. Only two pieces of data were released from the Eurozone
this morning.
The second release of third quarter GDP for Germany was
unchanged, confirming 0.6 percent growth in the quarter. The French consumer
spending report however took a sharp dive, falling unexpectedly for the second
consecutive month by 0.6 percent. This is quite concerning as growth in the
Europe’s third largest economy begins to falter. For the ECB to truly commit to
driving rates much higher, Germany cannot be the only country that is improving.
British Pound
The British pound has finally managed to muster a somewhat
respectable rally thanks to broad dollar weakness. Sterling traders continue to
struggle with predicting what the Bank of England may do next. yesterday’s batch
of news / data releases does little to clarify the picture, instead it makes
reading the crystal ball even more difficult.
The CBI industrial trends survey for the month of November
remained unchanged at -25. The market had actually expected an improvement to
-22, which is mildly disappointing. On the flip side, gas prices in the UK
surged to record highs due to colder weather. For the time being, the BoE is
still expected to remain on hold in December, but focus will be turned to
today’s Bank of England Monetary Policy Meeting minutes. It will be interesting
to see whether the vote to keep rates unchanged last month was unanimous. If
there are dissenters, it could shed some more light into what the central bank
may do next.
Japanese Yen
The Japanese Yen strengthened against the dollar as the
currency pair struggles to break the psychologically important 120.00 level. The
only pieces of economic data released overnight were the tertiary industry index
and the all industry activity index — both of which came in weaker than
expected. They reversed some of the gains that we saw back in August and suggest
that spending on the service sector may not be as buoyant as the market may have
initially expected. For the most part, the benign data is in line with recent
concerns that the Japanese economy is stalling.
The stock market however continues to rally, with the Nikkei
having only recently breached the 14,500 level. Japanese markets are closed
tonight for holiday, which means that trading in USD/JPY should be even more
quite as the US markets end early. On a side note, Yen traders are somewhat
disappointed by the lack of new advancements on the Chinese revaluation front.
There were hopes that China may revalue their currency once again either ahead
of or during President Bush’s visit last week. As we all know by now, that did
not happen. Nevertheless, another move needs to happen; it is just a matter of
when.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.
Kathy has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.