This is all it takes for the euro to rally sharply
The euro continued its
vertical up move in early European session today hitting 1.2575 spurred by a
massive change in market sentiment as the combination of surprisingly
negative US economic data and escalating concern over the long term consequences
of hurricane Katrina disaster have shifted traders expectations from a series
of Federal Reserve rate hikes to possible future interest rate cuts. Since
Wednesday’s shocking drop in Chicago PMI from 63.5 to 49.2 the EUR/USD has
increased 375 points — the largest one week gain in over a year.
The precipitous decline in US economic demand
caught most market players completely by surprise as euro shorts scrambled to
cover their positions in relatively thin market conditions with most dealing
desks at half staff during the final week of the summer holidays.
With disarray and complete chaos in the Gulf
Coast region now pushing gasoline prices above $3.00/ gallon in most parts of
the nation, most analysts believe that the Fed may pause its tightening monetary
policy in September so as not to aggravate the tenuous economic situation any
further. The Fed, for its part, has remained adamant in its insistence that it
will maintain course. However as, Jim Willie the editor of Hat Trick newsletter
noted today,†The US Fed has consistently reacted to coincident indicators, and
not to forward indicators, a truly inept practice. “ Our own anecdotal evidence
showed that a full tank fill up of the Ford Expedition belonging to the
gentleman who supplies us with our nightly coffee from his cart has skyrocketed
to $95.00 from $60.00 only a few weeks prior. As that scenario plays out a
million times a day across the country, the depressive effects of this dynamic
on US consumer spending will become evident very quickly. The market now
believes the game has changed and US interest rate hikes which have been the key
driving force behind dollar’s rise are no longer a certainty. Even if today’ s
Non-Farm payrolls report better than expected results the market will already be
looking to the slowdown in September data and any profit taking drop in the EUR/USD
will only likely be a retrace.
Boris
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
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.