fundamental alert

Forex Market Update: Euro-Dollar (EURUSD) Dips Lower, All Eyes on Policy Actions (Update)

Monday, 27 October 2008 07:55:54 GMT  |  DailyFX Research

Euro-Dollar (EURUSD) came under pressure in to the European session, with growing concerns over Eastern European economies weighing on sentiment. EUR-USD extended its recent losses to trade down to early European lows of 1.2464 after stops gave way below 1.2500. Western European banks are reportedly holding three-quarters of all emerging market exposure and any runs on particular countries could see further contagion in Europe. EUR-JPY and EUR-CHF maintain a heavy tone as a result, with the market favoring low risk currencies, although the risk of Japanese intervention may result in outperformance for the Dollar and Swiss Franc following comments on potential Japanese action in the yen. EUR-USD's move below 1.2485 support will seen the pair challenge support between 1.2430-50 and option related interest lower down at 1.2400-25. The pace of any decline is expected to remain slow with Asian reserve managers still persistent buyers on dips.

Meanwhile, market participants will be braced for policy actions and/or statements, including the possibility of another coordinated rate cut (which by definition may have limited FX impact) and, if we are to take the Japanese finance minister at his word, a G7 statement on currencies. Regarding the G7 statement prospect, Nakagawa said that it would only mention the yen, which suggests that it would be a rhetorical effort to introduce a greater sense of two-way risk to the market, which could fore run some actual "smoothing" interventions by the BoJ, if not other central banks (U.S. and European policymakers and not likely to be too worried about USD-JPY, EUR-JPY or GBP-JPY currently). Any yen correction on the back of a G7 statement or actual BoJ intervention could fuel a EUR-USD recovery rally via the EUR-JPY leg, though with the ECB having much greater scope to slash interest rates than the U.S., possible fallout from Eastern European markets and demand for the safety of the U.S. Treasury market, the USD should remain generally supported versus the EUR. GBP, meanwhile, is likely to remain the weakling of the majors given the relatively severe house price bust there and rapid deterioration in the U.K. economy.

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