2 Things Will Stop the Euro's Rise

The all-time high in the Euro is now 1.4120. As the currency continues to press higher, the burning question on everyone?s mind is, What Could Stop the Currency?s Rise?

From the US perspective, a series of very good US economic data could help the dollar recover, but that will take time because we need to see renewed strength in core sectors such as housing, consumer spending and the labor market. In the immediate future, developments in Europe could also trigger a top in the Euro. The two things that can stem the Euro?s rise are verbal intervention from ECB President Trichet and significantly weaker economic data. In terms of data, we are already seeing signs of instability. Service sector PMI in the Eurozone dropped from 58.0 to 54.0, the lowest level since August while manufacturing PMI fell from 54.3 to 53.2. The German IFO report is due for release next week and we expect the recent problems in the US, credit market turmoil and rising Euro to take a big toll on business confidence. If that is followed by weakness in German retail sales, we could see some traders take profit on the Euro. In terms of the ECB, there are no signs of concern amongst the central bank. In his speech today, ECB President Trichet simply touted the success of the Euro and reiterated the need for the central bank to be independent. The reason why we are paying so close attention to ECB comments is because back in 2004, when the Euro hit a record high of 1.3667, the currency topped when Trichet called the move “brutal.”

Written by Kathy Lien, Chief Currency Strategist of DailyFX.com