Euro Higher On Improving Sentiment and Manufacturing, Will U.S. Housing Data Sink Dol

The Euro quickly erased earlier losses at the beginning of European trading to trade above 1.3940 as equity markets reversed and improving fundamental data helped add to bullish sentiment.

[B]Talking Points
• Japanese Yen: Found Support At 95.00
• Pound: Choppy Despite Improving Credit Conditions
• Euro: Trichet Says Rates Appropriate
• US Dollar: Existing Home Sales On Tap

[/B][U][B]Euro Higher On Improving Sentiment and Manufacturing, Will U.S. Housing Data Sink Dollar?[/B][/U]

The Euro quickly erased earlier losses at the beginning of European trading to trade above 1.3940 as equity markets reversed and improving fundamental data helped add to bullish sentiment. Stocks opened down over 2% across the board but a sharp reversal in risk appetite saw several of the major indices turn positive. Improvements in German Gfk consumer confidence to 2.9 from 2.6 and the French business confidence indicator to 75 from 73 showed that optimism continues to build. Adding to the bullish sentiment and signs the economy is stabilizing was a rise in Euro-zone PMI manufacturing to 42.4 from 40.7. However, an unexpected drop in PMI services to 44.5 from 44.8 and French consumer spending by 0.2% raised some red flags as risks remain to growth.

President Trichet stated today that interest rates are currently appropriate and that the central bank is obliged to focus on price stability. He would go on to say that, “We will ensure that inflation expectations remain solidly anchored and impervious to short-term changes in inflation, even in the current context.” The remarks fueled expectations that the ECB would be the first to raise rates and although it may not happen until 2010, the higher interest rate expectations could continue to provide Euro support. EUR/USD remains range bound between the 20-Day SMA at 1.4000 and 1.3793-38.2% Fibo. A break of either bound could lead to a longer term trend in either direction. At this time we still favor a bearish bias with the single currency’s correlation to equity markets and the prevailing view that current prices aren’t supported by existing data.

The pound continued to see choppy price action despite bullish comments from BoE chief economist Dale that initial signs were encouraging from quantitative easing efforts. Although, he would state that it is still too early to evaluate the full impact, but “The growth rate of underlying broad money has picked up in recent months,” and “it is likely that yields are lower than they would have been” for gilts. A rise in BBA loans for House purchase to 31K from 29K added to evidence that credit markets are thawing and beginning to normalize which should start to translate into future growth. However, the sterling may have most of the expected improvement priced into the currency which increases its downside risks. If the GBPUSD closes below the 20-Day SMA at 1.6295 today it would be the first time since 4/29 and a strong bearish sign. Support may be found at 1.600 with 1.5798 the next major level, where we find 38.2% Fibo of 1.4400-1.6662 and the 6/8 low.

The dollar has started to give back some of its gains from the past two days despite the dimming outlook for a global recovery. Concerns that current valuations in equities aren’t justified if we see a mild recovery had sunk equity markets. However, we have seen European indexes reverse losses as deep as 4% with the FTSE and DAX turning positive. U.S. existing home sales for May is due for release and the 4.82 million that is expected would be the highest since October, 2008. Although it is far from the ten year average of 5.83 it could be a sign the sector is stabilizing and may add to the renewed risk appetite. The Richmond Fed manufacturing reading is forecasted to be positive for a consecutive month with a reading of 5 which would be the highest since March 2008. It would mark the first time we have seen consecutive positive readings since September 2007 as output has sharply rebounded from the all time low in December of -55. Bullish potential exists for the dollar as uncertainty over the pace of the recovery remains and today’s weakness could be a buying opportunity.

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To discuss this report contact John Rivera Currency Analyst: <[email protected]>