Euro Fails the First Test of 1.50- More to Come?

Talking Points

·          Australian Dollar: drifts lower ahead of week-end election

·          Japanese Yen: Breaks 108.00 in earlier Asia trade

·          Pound: GDP shows sluggish growth in services

·          Euro: PMI Services hurt by credit crunch, euro fails first test of 1.50

·          US Dollar: no data scheduled

In what is quickly becoming a Thanksgiving tradition, the currency markets went for a wild, volatile ride tonight as the EURUSD rose more than 100 points in less than two hours, coming within the range of the key 1.50 level, before dropping just as quickly to 1.4800.  The culprit for the whipsaw action was actually USDCHF which has been trading very close to the psychosocially important 1.1000 mark for several days. Today, during the Asian session traders were able to trigger stops below that barrier and precipitated a massive decline in the dollar across all the majors as holiday thinned liquidity greatly exaggerated the price action.

When Europe came on line, trading stabilized and EURUSD quickly backed off its best levels of the day as economic news and comments by ECB chief Jean Claude Trichet set off a wave of profit taking. President Trichet stated that "brutal FX moves” were “not welcome” -rhetoric that he last used in 2004 when EURUSD was making a similar relentless march upward.  The warning from Mr. Trichet suggests that EZ monetary officials are clearly exasperated with euro’s recent strength believing it to be overdone.

The unit was further hampered by soft economic data from the EZ tonight. French consumer spending sank to a 13 month low contracting -1.1% vs. -0.2% forecast as higher fuel costs and tighter credit conditions weighed on the consumer in the regions’ second largest economy.  Additionally the flash PMI data printed slightly weaker than expected at 53.8 vs. 53.9, but the true surprise was the sharp pullback in services which declined to 53.7 from 55.8 the month prior. Although the inflationary pressures continue to persist, the mounting evidence of a slowdown in EZ growth leaves very much in doubt the possibility of any tightening action from the ECB undermining euro bulls strongest argument for higher exchange rates ahead.

Finally, UK data was weaker as well with preliminary GDP data expanding at 3.2% vs. 3.3% forecast. This was the slowest pace in nearly a year, as credit crunch woes took their toll. As we’ve noted many times in the past, amongst the majors UK remains the economy most vulnerable to the financial sector meltdown and any further deterioration in either the credit or the equity markets could pressure the pound lower.