The EUR/USD saw choppy price action during the overnight sessions on the back of an unexpected jump in German consumer confidence and subsequent testimony from various ECB committee members including President Trichet. The Gfk AG’s index saw an increase to 5.9 from 4.8 in April , as consumers in Europe’s largest economy have seen their level of optimism rise to a seven month high. Strong employment and rising wages have offset accelerating inflation and slowing growth, which continues to foster household spending. Meanwhile, comments from Trichet and Liebscher in Vienna and Mersh in Luxemborg were sending conflicting messages to the market, which led to increased price volatility.

The Euro had found a bid tone on the better than expected German confidence number, before the markets misinterpreted a statement from Liebscher, where he stated that the ECB “must act preemptively”. Many thought the governor of Austria’s National Bank was speaking to the point of slowing growth, which sparked an immediate 50 point sell off in the Euro. However, when markets figured out that he was speaking of inflation risks and his subsequent comments would confirm his hawkish stance, the pair immediately reversed. President Trichet would follow with his traditional hawkish rhetoric and commitment to price stability which provided more Euro support, outside a temporary dip on statements from ECB’s Mersh warning of further fallout from the financial crisis.

The pound started the European session, weighed down by more dour housing data, as Hometrak reported house prices declining 0.9% from a year ago. Since then the Sterling has jumped over 75 points as the strength in the Euro has spark broad based dollar selling. Once the pair broke above 1.9850, stop tripping would send it above 1.9890.

The Australian and New Zealand Dollar’s found support as strengthening equity markets have fueled risk appetite and leading to the high yielding currencies benefiting from increasing carry trade.

The economic docket for the U.S. will start the week on a quiet note but by week’s end may be the most significant week of the year. The calendar contains a plethora of event risk including a FOMC rate decision, GDP, NFP’s, ISM Manufacturing, Consumer Confidence, Chicago PMI and personal consumption and spending indicators. Expectations are that the Fed will cut rates and the subsequent commentary will imply that they will pause in their current easing policy. On those expectations the dollar should continue to receive support as the week goes on.

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04-28-08