The overnight session saw price action thoroughly ignore the economic calendar as the forex markets digested the seemingly inexplicable surge in dollar strength in the quiet lull between the close in New York and the opening bell in Tokyo. A light data docket in European trading is likely to reinforce existing macroeconomic themes, with traders paying more attention to the looming US Non Farm Payrolls release late into the session.
[U][B]Key Overnight Developments[/B][/U]
[B]• Oil continues lower, testing below $108/barrel
• Euro, Sterling break multi-year support ahead of NFP report[/B]
[U][B]Critical Levels[/B][/U]
The Euro collapsed in overnight trading, breaking deeply below 1.43. Near term support stands at 1.4165 while resistance is established at 1.4473. Sterling followed the Euro lower, breaking below 1.7600. Support is seen at 1.7489, with resistance at 1.7818.
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[U]Asia Session Highlights[/U][/B]
The overnight session saw price action thoroughly ignore the economic calendar as the forex markets digested the seemingly inexplicable surge in dollar strength in the quiet lull between the close in New York and the opening bell in Tokyo. The Euro plunged 105 pips in the span of 5 minutes, breaking 1.43 and remaining below it for the remainder of Asian trading. A variety of explanations surfaced, including a statement from Luxembourg Finance Minister Jean-Claude Juncker who said that the European Commission’s GDP forecast would be revised lower and that the Euro was “overvalued”. Whatever the reason for the selloff, the EURUSD is now below key trend line supportahead of tomorrow’s critical Non-Farm Payrolls report.
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[U]Euro Session: What to Expect[/U][/B]
German [B]Industrial Production[/B] is expected to shrink -0.5% in July, bringing the annualized growth rate to 0.8%, the lowest in over 3 years. The release will reinforce current macroeconomic themes: sharply deteriorating economic activity in the 15-nation regional bloc has fueled speculation of near-term monetary easing and led to aggressive selling of the Euro. Indeed, EUR/USD has fallen nearly 12% since mid-July.
For their part, the European Central Bank has done everything possible to project a hawkish bias. Bank President Jean-Claude Trichet has continuously pressed the point that although crude trades lower, there remains lingering price pressure “in the pipeline [which] undoubtedly creates more risks.” And yet, the ECB’s stance appears more grounded in posturing than principle. As a relatively young central bank that has never addressed a major economic crisis, the ECB has everything to prove when it comes to their inflation-fighting credentials. Still, their time is quickly running out: GDP contracted in the second quarter and is likely to issue an even deeper negative result in the three months to October. Indeed, the central bank’s projections for GDP were revised sharply lower and Trichet himself admitted that the region was heading for an “episode of weak activity” even as rates were left unchanged.All told, bond yields forecast the first 25 basis point cut in the first quarter of 2009, followed by more easing until benchmark rates reach 3.75%.
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