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Euro Gains Capped As Exports Drop Most In Eight Years, Will Risk Appetite Weigh On Dollar?

Friday, 16 January 2009 10:02:33 GMT  |  John Rivera, Currency Analyst

After reaching as high as 1.3279 as it continued to find support following ECB President Trichet’s signaling that the central bank will most likely pause their current easing policy in February. The Euro/dollar has traded sideways since running into resistance as bullish momentum was derailed by the Euro –Zone trade balance report showing that exports fell the most in eight years.

Talking Points
• Japanese Yen: Trading above 90.50
• Pound: Looking to Test 1.5000
• Euro: Exports Drop Most in Eight Years
• US Dollar: Inflation and Consumer Confidence Data Ahead

Euro Gains Capped As Exports Drop Most In Eight Years, Will Risk Appetite Weigh On Dollar?

After reaching as high as 1.3279 as it continued to find support following ECB President Trichet’s signaling that the central bank will most likely pause their current easing policy in February. The Euro/dollar has traded sideways since running into resistance as bullish momentum was derailed by the Euro –Zone trade balance report showing that exports fell the most in eight years. The region reported a deficit of 7.0 billion for November after a surplus of 1.0 billion the month prior. The biggest drop was in energy products as declining global demand has sent prices free falling. The region saw demand fall from three of the world’s largest economies as exports to the U.S., Japan and the U.K. fell.

Although the Euro may continue to find support with the prospect of a rate cut in February, the fact that the region’s sinking deeper into a recession will limit upside potential. Indeed, President Trichet also signaled the current recession would leave the March decision as the next significant “rendezvous” which is a clear sign that we may see further easing from the central bank at that time. Indeed, the MPC leader would also state “To the question is 2 percent the lowest level we will attain, I say no,” Trichet told Japanese broadcaster NHK in an interview broadcast earlier today. “If you ask me the question will you go to zero, I would say no, we won’t”. The committee made oit clear that they don’t see deflation as a concern and therefore would not to take drastic measures by instituting a ZIRP, which will most likely leave the committee unwilling to cut rates lower than 1%. Indeed, markets are only pricing in another 28 bps of rate cuts over the next twelve months.

The pound continues to remain range bound which will make technical factors more significant in future price action. We have seen the Sterling settle into the range of 1.4500-1.5500 and current momentum has it on course to test the upper band with the 50-Day SMA at 1.4950 as the next major hurdle. We may see fundamental come back into play next week with CPI, BoE minutes, and employment data on the economic docket. Markets are also expecting the BoE to slow their easing policy with only 28 bps of rate cuts anticipated. Therefore we may have seen the currency put in a bottom which could lead to more upside potential.

U.S. consumer prices are expected to have realized its first annualized drop since 1954. Economists are predicting that inflation fell to 0.2% from 1.1%. Falling oil prices have been the main driver of lower prices, but the lack of consumer demand has also forced retailers to slash prices in order to lure customers. Job losses in excess of a 1 million over the last two months of the year have led to consumer’s retrenching which may continue to add pressure to prices. The decline may raise concerns over corporate profits which have been a main source of recent risk aversion. If that sentiment continues then we may see continued dollar strength. Additionally, the U of M consumer confidence reading is expected to decline to 59.0 from 60.1 which will add to future domestic growth concerns. However, Dow futures are up over 100 points as U.S. markets look to continue build on yesterday end of the day rally which has led to strength in Asia and Europe. The increase in demand for risky assets will lead to the selling of U.S. Treasury’s and most likely dollar weakness on the day.

Will The EUR/USD Break 1.3000? Join us in EURUSD Forum

Related Articles:
Euro Forecast Unclear Following European Central Bank Rate Decision
Euro-Zone Trade Deficit Widens as Exports Drop Most in Eight Years
EUR/USD Forecast After the ECB Rate Decision

To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com

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