Euro Breaks Below 1.5400 Ahead of ECB ??? More Downside Ahead?

[DailyFx]

Another seesaw night of trade as EURUSD first weakened materially in Asia dropping below 1.5400 level only to bounce at the start of


Talking Points
• Japanese Yen: takes out 106.00 on dollar strength Nikkei recovery
• Euro: breaks 1.5400 ECB on tap
• Pound: Weighed by HBOS numbers
• US Dollar: jobless claims on tap
• Canadian Dollar: Ivey on tap
Another seesaw night of trade as EURUSD first weakened materially in Asia dropping below 1.5400 level only to bounce at the start of Europe on reputed central bank diversification buying then to slump once again ahead of the ECB rate announcement at 11:45 GMT. As we noted yesterday, “the pair remains in a tense standoff between bargain hunters hoping to rally it back to all time highs and momentum players looking to push it closer to the 1.5000 figure. “

The economic data from the region was mixed with French unemployment showing marked improvement dropping to 7.2% from 7.5% forecast, but German Factory orders slipping significantly in April to -1.8% from 0.5% projected. Growth in the region is clearly slowing down and it appears that the Eurozone’s best economic numbers have already been recorded in Q1 of 2008. As the year progresses the ECB will be faced with an ever more challenging task of controlling inflation expectations while trying to avoid a serious economic downturn.

For the time being however, Mr. Trichet and company are unlikely to change their stance. The ECB chief is expected to remain relatively hawkish at today’s press conference, stressing price stability above all else. Nevertheless, the market will be attuned to any hint of a possible turn in policy in the second half of 2008. If Mr, Trichet acknowledges the downtrend in the recent economic data and tempers his growth forecast due to persistently high energy prices, the euro could see more weakness for the rest of the day as some players will begin to price in the possibility of rate cuts before the year end. If on the other hand, President Trichet refuses to deviate from his well known script, the unit could easily recover from its overnight weakness.

On interesting point to consider will be Mr. Trichet’s reaction – if any – to Mr. Bernanke statement in support of the dollar. If he expresses solidarity with Mr. Bernanke, the greenback could rise on further momentum buying.
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