special reports

A Range Bound Euro Drew Interest From DailyFX Analysts In November. Where Do They Stand Now?

Wednesday, 10 December 2008 16:07:19 GMT  |  John Rivera, Currency Analyst

The DailyFX analysts saw the Euro crosses draw their interest in early November as expectations of increased risk appetite on the back of the efforts by European governments to help stem the financial crisis in October, lead to initial long positions. However, lower interest rate expectations would have some of our analysts start to reverse sentiment. Nevertheless, the range bound price action would provide opportunities for both sides.

After G-7 leaders threw everything they could at the credit crisis, optimism had grown in early November that equity markets had reached a bottom. The increased risk appetite would help lead the Euro higher and elicit long positions from our analysts. However, a 50 bps cut by the ECB and the signal that future easing was ahead had lowered interest rate expectations for the region and would weigh on the single currency. Growing concerns over the global economy as the U.K. EZ, Japan and the U.S. would all confirm that they were in a recession. Nevertheless, price action remained in the broad range of 1.2400-1.3000. as expectations that governments and central banks would do whatever is necessary to avoid further declines. After the one way direction that the Euro traded in the previous three months, the more traditional price action would allow traders to employ more technical based strategies leading to both long and short positions.



What Has Changed?

The Euro continues to remain range bound despite aggressive easing from the ECB and talks of another fiscal stimulus plan from the U.S. Risk appetite continues to be the main driver of price action as evidenced by the strong correlation between the Dow and the EUR/USD (see chart below). The lack of clear direction in the pair has led the majority of our analysts to seek returns in other currencies. However, our chief strategist and senior currency strategist both saw fit to short the pair this week as it is trading near resistance at 1.3000. The global economy is at a critical stage and the fundamental data continues to point toward slower growth with Chinese exports falling for the first time in seven years and imports plunging. The Euro-Zone also continues to show weakness with the service and manufacturing sectors both falling deeper into contraction and retail sales falling 0.8% in October. However, a bailout of the U.S. auto industry, a second U.S. fiscal stimulus plan, and further easing from the major central banks are all expected which could increase optimism which may send the Euro above resistance.

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