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Euro Choppy Despite Improvements in Confidence and Consumption With ECB Rate Decision Looming.

Monday, 29 June 2009 09:57:48 GMT  |  John Rivera , Currency Analyst

The Euro has started to see choppy price action after initial weakness on broad based dollar strength. An improvement in Euro-zone economic confidence to 73.3 from 69.3-the highest since November- led to a brief bout in bullish sentiment.

Talking Points
•    Japanese Yen: 95.00 Remains Supportive
•    Pound: Mortgage Approvals Show Slight Improvement
•    Euro: Choppy Ahead of ECB Rate Decision
•    US Dollar: Finds Support On Chinese Official Comments

Euro Choppy Despite Improvements in Confidence and Consumption With ECB Rate Decision Looming.

The Euro has started to see choppy price action after initial weakness on broad based dollar strength. An improvement in Euro-zone economic confidence to 73.3 from 69.3-the highest since November- led to a brief bout in bullish sentiment. There was a broad based increase in optimism in the region with consumer confidence improving as well to -25 from -30. The improving sentiment is starting to translate into greater domestic demand, evidenced by the increase in June’s Bloomberg retail indicator to 47.5 from 47.1. The EUR/USD continues to find support at the 20-Day SMA at 1.4002 which may be a sign of upside potential. 

There have been signs that the European economy is improving but will it be enough to keep the ECB on hold at this week’s policy meeting. The OECD last week called for the central bank to cut interest rates immediately but that was in stark contrast from the rhetoric from policy makers. Several committee members including President Trichet stated that current interest rate were appropriate signaling that the current %1.00 could be the end of their easing policy. If we see the expected rate hold followed by a hawkish Trichet then the Euro could see significant support and could break it from its current range of 1.3800-1.4200. However, if we see the door left open for additional rate reductions as they see further downside risk to the economy could lead to a break below 1.3793- the 38.2% Fibo of 1.2884-1.4340. The level has remained as staunch support and a breach may set up the single currency for a sharp fall and a possible test of the 200-Day SMA at 1.3331

The Pound has seen choppy price action starting with an earlier spike that was driven by a pick up in risk appetite. Higher European equity markets and U.S. futures paring earlier loses helped spark sterling bullish sentiment, before a less than impressive lending report curbed enthusiasm. Mortgage approvals rising to 43.4K from 43.2K in May, was missed the 46.0K forecasted which raised concerns. A housing recovery remains a key to an economic recovery. Indeed, the Hometrack housing survey showed that prices remained flat in June which reinforced an earlier report from Rightmove which showed the first decline in five months. The stabilization of the housing sector is a key to a U.K. economic recovery and if we see it begin to stall as credit conditions remain challenging then it could start to weigh on the pound.

The dollar has remained supportive overnight as China’s central bank chief Zhou Xiaochuan said his country’s foreign exchange reserve policy is “quite stable” , which was a reversal from previous calls for a super sovereign currency.  A relatively empty calendar could leave price action at the mercy of the broader themes which could include a pull back in risk appetite. Indeed, we are seeing U.S. futures trade lower which could add to bullish sentiment. A shortened holiday week could see light volume which may lead to choppy price action, especially ahead of the unusual Thursday employment report. The economy is expected to have lost another 350K jobs which may disappoint market participants that were expecting continued improvement. 

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Forex Trading Weekly Forecast - 06.29.09

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


 

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