Euro, Pound Remain Under Pressure As Equity Markets Fall Amidst Economic and Politica

The Euro continues to remain under pressure as it fell to as low as 1.3810 during overnight trading as heavy equity markets, profit taking and concerns over Latvia helped send it lower.

[B]Talking Points
• Japanese Yen: Flat As Improved Eco Watchers Add Yen Support
• Pound: Political Troubles Remain Weighing Factor
• Euro: Latvia Concerns Add To Euro Weakness
• US Dollar: Is U.S. Recovery Providing Dollar Support

[/B][U][B]Euro, Pound Remain Under Pressure As Equity Markets Fall Amidst Economic and Political Concerns [/B][/U]

The Euro continues to remain under pressure as it fell to as low as 1.3810 during overnight trading as heavy equity markets, profit taking and concerns over Latvia helped send it lower. The European Sentix investor confidence indicator rising above expectations of -31 to -27 temporarily helped slow the downside momentum as the increasing optimism may be a sign that the Euro-zone economy is reaching a bottom. However, the depth of the Latvian recession and the amount of intervention the government has needed to maintain the peg to the euro has raised concerns in the region which continues to send the EUR/USD lower.

Nevertheless, President Trichet following the ECB’s rate hold last week stated, that the committee believes that the worst has passed and that signs of a recovery are emerging. The central bank leader said that interest rates were appropriate for now, which left the door open for another rate cut. Therefore, if we continue to see continued trouble from the emerging economies in the region further easing is still a possibility which could add to bearish Euro sentiment. The biggest threat to the single currency could be the pace of the U.S. recovery which appears to be well ahead of Europe. The EUR/USD has fallen below the 20-Day SMA at 1.3877 which leaves the 5/28 low of 1.3792 as the next support level. A break below there could set up a fall back to the 50-Day SMA at 1.3511.

The Sterling has also broken below its 20-Day SMA as the country’s political turmoil continues to steer forex traders away from the currency. Indeed, last week saw Prime Minster Gordon Brown reshuffle his cabinet in order to try and reestablish loyalty of ministers after several walked out of his government. The move hasn’t helped the Labour party which is running third in the elections and the uncertainty of the political direction of the country continues to be a weighing factor for the currency. A move lower to the 200-Day SMA at 1.5398 appears to be the path of least resistance for the GBP/USD as dollar strength adds to the downside risks.

The U.S. dollar continues to find support following Friday’s better than expected Non-farm payroll number which showed that the pace of job losses significantly slowed for the economy. However, we are seeing weak equity markets in Asian and Europe with U.S. futures pointing toward a lower open and the risk aversion could also be adding greenback support. It is still too early to tell whether we are seeing a shift toward positive U.S. fundamentals generating bullish price action or whether risk winds will continue to be the overriding factor in price action. Nevertheless, both scenarios are signaling more dollar strength ahead and which should continue without any fundamental releases on the economic docket to impact sentiment. This week’s Fed Beige book and U.S. retail sales reports will help give us more insight into whether the improving outlook for the U.S. economy will now become a positive force in future dollar sentiment.

Will The EUR/USD Fall Below 1.3500? Join us in the Forum

Related Articles:
Forex Trading Weekly Forecast - 06.08.09

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