Monday, November 26, 2007

EUR/USD Outlook for week

EUR/USD open price Nov 25 - 1.4868. Last week +1.77 cents.

Friday produced some volatile market action when liquidity levels were low and the euro soared to 1.4966 before being pegged back during the European session. The very fact the market was able to move to such a high at all demonstrates there remains little resistance to the euro’s current ascendancy and Central Bank intervention appears to be some way off. The downward trend in US stock markets and softer economic data has futures markets now pricing in a 90% chance of a further Fed rate cut in December. With the ECB continuing their hawkish tone against an outlook of further US rate cutes, there appears little prospect of any near-term trend reversal in EUR/USD. Although the single currency retreated sharply Friday, it still rounded off the week with a 1.75 cent gain. The euro may be pushed up close to the 1.50 line again Monday or Tuesday and if it breaks through this key price level, it could rise rapidly to 1.51 or 1.52. There are a number of key economic releases over the course of this week, the most important being US new home sales, existing home sales, consumer confidence and personal income and expenditure. On the euro side, only a sharp pullback in November's German Ifo index might undermine the single currency, while a higher inflation figure for November (published next Friday) should keep hawkish rhetoric flying from ECB officials and boost the euro. There are several speeches from US Fed members and these will need to be monitored closely. Fed officials two weeks ago hinted at no further rate cut this year, but given the negative sentiment that has seen US stocks plunge in the plast week, any softening in tone from Fed addresses this week will be read as a probable December rate cut and severely damage the dollar. Upside targets this week are 1.4850, 1.4880, 1.4920, 1.4950, 1.4970, 1.50 and 1.51. Euro support is seen at 1.4780, 1.4750, 1.47, 1.4660, 1.4570 and 1.45.

Global stock markets had a turbulent time last week but recovered Thursday and Friday while the US was on holiday. Global stock prices now reflect broader concerns about the global economy, so this is no longer exclusively about a US slowdown and bank write-downs because of subprime mortgages. EUR/USD has failed to price in any of this new reality and last week we saw the euro almost reach 1.50 against the dollar, 16 cents up from its rate in the middle of August. There is a very significant dislocation in currency markets and the euro’s price is now greatly inflated. I have no doubt the market will now wish to take out 1.50 simply because price is so close to this level, but what happens thereafter will be very interesting. A 1.50 exchange rate with a less favourable outlook for the euro economy in 2008 is going to spark quite an element of acrimonious debate within the euro community, the charge likely to be led by French President Mr Sarkozy. The ECB will be under more pressure than ever on the currency issue when they meet in early December and they may be forced to soften their stance, particularly if financial markets continue to experience the same levels of stress as in the past fortnight. We could potentially be on the cusp of a turn in the euro and at the very minimum a significant downside correction is due. The dollar must hold the 1.50 price line for now and at least get some euro supporters to believe a top has been formed in the pair. This could trigger a sell-off and a decline to 1.45. US GDP may be revised upwards by as much as 1% this week, meaning despite all the doom and gloom, the US economy will have grown by twice the annual rate of the euro economy over Quarter 3. Maintain a close watch on ECB and Fed officials this week for clues as to the next policy moves by the respective Central Banks. Any upside surprise in October’s existing home sales data from the US may also boost the dollar. Downside price onjectives this week are 1.4785, 1.4740, 1.47, 1.4650, 1.4570 and 1.4510. Resistance comes in at 1.4870, 1.49, 1.4970 and 1.50. Bears need to hold the key resistance lines early in the week, if the downside is to prevail over the next 5 days.

Bob B and Ted B - Nov 25

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