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Euro Finds Direction from Fundamentals, Influences Broader Sentiment

Euro Finds Direction from Fundamentals, Influences Broader Sentiment

2010-07-13 19:45:00
John Rivera, Currency Analyst
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EUR/USD

The Euro staged an impressive rally on the back of a positive outlook for earnings and a successful Greek bond auction. The first attempt to sell its debt for the cash strapped nation since the EU-IMF bailout was oversubscribed at a yield lower than that of the IMF debt, signaling that that demand does exists for Greek debt. However, the bonds only have a six month maturity and can’t be used to gauge the market’s overall confidence in the Greece’s economy and ability to bring its deficit under control. The fact that it came on the heels of a Moody’s downgrade of Portugal quickly eased fears generated by the lower credit rating and reversed the Euro’s post downgrade losses. As concerns over the debt crisis ebb and flow so have the outlook for interest rates and the Euro’s fortunes, leading to a strengthening correlation between the two. At 47% the relationship has become the main driver of price action surpassing risk sentiment at 44%. However, today’s rally was in tandem with broader optimism which was most likely rooted in the successful Greek bond auction. Indeed, the region’s fortunes continue to be a major concern for markets and a driver of broader sentiment.

PD-10-07-13-01

ECB Interest Rate Expectations

Interest rate expectations have steadily risen since the height of the European debt crisis with overnight index swaps now pricing in 37 bps of tightening in the next year. The ECB left rates unchanged at their policy meeting on July 8th as they continue to see growth and inflation risks balanced. Nevertheless, price growth remains the central bank’s focus and a rise in tomorrow’s consumer price index could raise yield expectations. Consumer prices are expected to remain at 1.4% which is well below the 2.0% target level and a distance away from becoming a catalyst for a rate hike. Discuss this and trading ideas join the EUR/USD forum.

PD-10-07-13-02

FOMC Interest Rate Expectations

Fed funds futures are showing a slight increase in the prospect for a Fed rate hike by year’s end with market’s pricing in a 14.9% chance of tightening in December. However, odds have significantly fallen from 26.9% a month ago as a weak labor market continues to keep the central bank on the sidelines. The June advance retail sales report is expected to show consumer consumption slipped 0.3% and a consecutive monthly decline will continue to dim the outlook for domestic growth. Today’s release of the May trade balance report did show a surge in imports and exports signaling that global demand remains firm. Therefore, we could see an upside surprise in domestic demand which could add to rising yield expectations.

PD-10-07-13-03

Risk

Alcoa kicked off earnings season on a positive note by beating expectations reinforce the positive outlook for corporate profits. However, a disappointing U.S. retail sales report tomorrow could end the euphoria, reminding traders that the labor market in the world’s largest economy continues to struggle which may lead to weaker demand. The Dow is testing trend line resistance and failure to hold above the level increases downside risks. However, more solid earnings and a positive consumption report could see technical levels broken and an extension of the bullish rally which increases upside potential for the EUR/USD. Discuss this and other fundamental data in the Economics Forum.

PD-10-07-13-04

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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