Euro Consolidates Gains - A Run for 1.6000?

[B]Talking Points

• Japanese Yen: Remains below 100 as equities mixed
• Euro: Consolidates yesterday’s gains after some profit taking
• Pound: Above 2.0100 on repute GBPCAD order and strong investment data
• US Dollar: GDP, jobless claims on tap[/B]

After a wave of profit taking in early European session that was triggered by technical rather than fundamental concerns, the EURUSD recovered most of its losses and was once again trading above 1.5800 level by the North American open. It was another quiet night on the economic calendar with only German GFK Consumer confidence survey on the docket, but yesterday’s one two punch of better than expected IFO numbers out of Germany and disappointing Durable Goods number out of the US continued to resonate through the currency market tonight bolstering flows to the euro.

Much to the surprise of most analysts, the divergence of the two largest economies in the world is becoming more rather than less prominent. In contrast to the US consumer confidence data, which recorded it worst reading since the days of the Nixon administration, German consumer sentiment actually improved to 4.6 from 4.4 forecast on better economic outlook.

As we’ve noted many times before, despite the combined challenges of appreciating exchange rates and faltering demand from the US, EZ economies continue to perform well by selling to the emerging economies of Asia and Middle East. With fundamental data at their back, euro longs will not doubt try to bully the pair towards the 1.6000 figure as momentum remains on their side.

If EURUSD does break through 1.6000, debate is likely to shift towards the idea of intervention. The Europeans have shouldered the biggest burden of exchange rate adjustments and up to now EZ business have been quite adept at hedging their books. However, if a break of the 1.6000 precipitates a dollar rout sparking massive volatility and panicky liquidation, the G-3 central banks may feel compelled to stem the tide. The key to whether intervention becomes a reality will depend largely on the velocity of the move rather than its absolute value. If the EURUSD continues its slow but steady ascent, monetary authorities will most likely attempt to only jawbone the move. However, if markets become disorderly, physical intervention may well be the outcome.

Today, the market will get a glance at the final US GDP release which is unlikely to be market moving given the backward nature of the data. More interesting to many traders will be the weekly jobless claims numbers which are expected to remain elevated above the critical 350K level. As unemployment begins to rise, the pressure on the Fed to continue easing will only escalate which in turn will increase the interest rate differentials between the euro and the dollar providing more fuel to euro bulls.

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