EURO Report
Scenario Analysis
Last week we indicated that EURUSD would most likely trade in a 1.1800-1.2850 range (1.2550-1.2850 actual). We have been expecting a sizeable drop of EURUSD below 1.23 but it has not occurred. Economic data out of Europe does not yet denote the drastic weakness we see in the US. The most likely trading range for EURUSD this week is 1.2400-1.3100.
The EURUSD rally following the ECB cut can be understood as a relief rally, much like the US equity acted when the Fed first cut rates. The FMV shows support for the euro but we question that the EU zone can hold on while the US economy is melting fast. The EU economic indicators this week have not had a major downward influence on the euro, at least for three months. So, it would take a major drop below expectations for EURUSD to drop below 1.25. Thus, we see 1.25-1.30 range trading opportunities but would likely sell EURUSD below 1.24 and buy EURUSD above 1.31, with approx. 100p SL points and 300p TP.
Current Environment
Capital markets endured a brutal Monday. Manufacturing data out of China, the UK and US were much worse than anticipated. A shaken US Treasury Secretary testified before Congress that the current crisis would be severe, but manageable. The Fed also had sobering words that day and spoke of a plan to buy long-dated US bonds - something that could lower yields but spooked the market because of the prospect of long term economic weakness. That day, the NBER declared officially that the US started a recession in DEC 07. Commodities and gold had a selloff. The major US stock indices ended the day down more than 6% after a five-day rally the previous week.
The impact on currency markets last Monday was noticeable. Dollar yen dropped below 93.00 and hovered near record lows and sterling dollar fell 600 pips. From that Monday, the ECB cut a bit more than expected and the US shocked all with a loss of 0.5 million jobs in Nov. The resilience of the euro dollar is translating into a firm range with support at 1.24 and resistance at 1.30. It might be another week or two of range bound trading before a (downward) breakout occurs, or sooner if a major EU indicator falls off a cliff.
STERLING REPORT
Current Environment
As we anticipated, GBPUSD dropped 4.4% and gave most of the gains of the previous week. The biggest drop occurred on Monday following the Manufacturing PMI release (34.4 actual, 39.8 consensus, 41.5 prev.) and surrounded by major global fears of a multi-year US economic downturn and rumors of US nationalization of banks. Crude oil prices dipped below $40/bbl, something we did not expect to see again. The yen and the dollar, of course, remained strong amidst this strong current of investor fear.
The Bank of England rate cut to 2.0% last week was an expected morale-booster with little real effectiveness. What will help the UK or US economies is a change in the collective perceptions about the crisis – not monetary policy alone. Both King and Bernanke understand they need to be cheerleaders of sort. Obama also understands this and that is why he has announced a new major US infrastructure plan. Indeed, a change in perception will come in time.
Scenario Analysis
Last week we indicated that GBPUSD would most likely trade in a 1.4600-1.5550 range (1.4450 -1.5400 actual). Our forecasts for the low and the high for last week were within 1% for both sides. For the coming week, we see a GBPUSD trading range of 1.40-1.5100.
Last week we highlighted an opportunity to sell GBPUSD from the 1.53 level where the market closed the previous week and to take profit below 1.47 – a potential 600 pip (4%) gain for the week. For this week, we see a potential challenge of 1.50 – possibly at the start of the week – only to fall and set new lows for the year as the week progresses. We see sterling more susceptible to negative news than the euro, so we would not be surprised to see EURGBP to stay at the present high levels (around 0.86) or even higher before it corrects. Once EURUSD falls below 1.24, watch for a significant correction in EURGBP to the 0.83 level or lower.
By ForexDatasource
