Dollar Rally Continues as Oil Eases, Stocks Gain and EZ Data Disappoints

EURUSD dropped to within a few points of the 1.5700 barrier for the first time in nearly two weeks

[B]Talking Points
• Japanese Yen: nears 108 on improving dollar flows
• Euro: slips to 1.5700 as oil continues decline IO collapse
• British Pound: MPC much more hawkish than expected
• US Dollar: Beige Book on tap
[/B]
Dollar Rally Continues as Oil Eases, Stocks Gain and EZ Data Disappoints
EURUSD dropped to within a few points of the 1.5700 barrier for the first time in nearly two weeks as a host of macro factors along with a deteriorating outlook for the region’s industrial sector weighed on the pair all night long. With crude prices approaching 125/bbl level inflation fears have eased over the past several days and traders have pared back any expectations of any additional rate hikes from the ECB.

Furthermore as US equities have rebounded the risk of systemic failure in the US economy has abated as well. This in turn has taken away one of the strongest reasons for euro bullishness –its value as a safe haven instrument. To add insult to injury, the latest EZ economic data has been horrid with Industrial Orders dropping a whopping –3.5% versus –1.5% forecast. Demand has clearly fallen off the cliff for the region’s producers and unless it rebounds quickly is likely to translate into weaker labor market data in the near term. Under such conditions that chances of another ECB rate hike this year is practically nil, as the monetary authorities in Frankfurt will come under enormous political pressure to remain stationary and perhaps even entertain a rate cut.

No talk of rate cuts out of the BOE however, as the release of the MPC minutes revealed a 7-2 vote rather than the 8-1 expected. The surprise however, was the fact that one of the votes was for a rate hike rather than a rate cut. According to IFR markets, “Tim Besley unexpectedly voted for a 25bps hike on the grounds the BOE credibility is suffering a great deal due to overshooting inflation, and a rate hike now would help restore its reputation.” The news cast a decidedly hawkish tone to the MPC release as it suggested that the BOE will remain neutral for the time being despite the growing evidence of slowdown in the UK. Pound therefore performed well on the crosses with EURGBP dropping below 7900 and GBPJPY reaching 215.00

The extent of the US slowdown will be reported in today’s Beige Book due out at 1600 GMT. Traders will be watching for any reports of particular weakness from the Fed districts across the US and the greenback may come under pressure later in the day should the news prove overly bearish. In the meantime the market remains very constructive for dollar longs as the unwind of the oil trade causes further euro selling. If today’s oil inventories figure pushes crude below 125/bbl then EURUSD could tumble below 1.5700 in sympathy.
Will EUR/USD Trade to 1.65? Join us in EURUSD Forum