The Euro has seen choppy trading after it fell to an intraday low of 1.5545 after a sharp sell off in Asian equity markets. Although we have seen risk aversion sentiment continue into European trading the single currency climbed back to 1.2623. Markets shrugged of a worse than expected final EZ PMI figure that was revised lower to 33.5 from 33.6.
[B][U]Talking Points[/U]
• Japanese Yen: Test Support at 97.00
• Pound: Manufacturing Contracts
• Euro: EZ PMI Declines
• US Dollar: ISM Manufacturing on Tap
[U]
Euro, Pound Trade Heavy As Equity Markets Decline, Manufacturing Activity Continues To Contract[/U][/B]
The Euro has seen choppy trading after it fell to an intraday low of 1.5545 after a sharp sell off in Asian equity markets. Although we have seen risk aversion sentiment continue into European trading the single currency climbed back to 1.2623. Markets shrugged of a worse than expected final EZ PMI figure that was revised lower to 33.5 from 33.6. France led the decline as its reading fell to 34.8 from 35.4 signaling that the region should continue to see weakness throughout the remainder of the year. Meanwhile,the Euro-zone CPI-estimate unexpectedly rose to 1.2% from 1.1% in January as prices have started to stabilize.
Despite the uptick in inflation it remains well below the ECB’s 2% target and shouldn’t deter the central bank from cutting rates further on Thursday. However, it could bring into question the depth of the easing which may lend Euro support, as markets are expecting a 50 bps reduction. The E.U voting down a bailout package for Eastern Europe has fueled concerns that protectionism will start to reign in Europe which could drag the economy lower. Therefore, traders may remain cautious which could limit any upside potential for the Euro as concerns remain that the decline in the developing countries will impact Western banks. 1.2500 remains a key level for bulls, as long as the support level continues to hold the current range of 1.2500-1.3000 is in play and we could see a move to test the upper price level despite the prevailing sentiment.
Sterling fell sharply 1.4176 on the declining equity markets and a slew of dour fundamental data has added to the weakness. The U.K. housing market continues to sink the Hometrak housing survey fell 0.8%in February leading to its largest annual decline on record of 10.0%. Banks continue to keep lending standards tight as mortgage approvals remained unchanged at 31,000. Meanwhile, manufacturing activity fell back toward record lows as the PMI reading slipped to 34.7 from 35.8 as the employment component hit a record low. Support continues to hold at 1.4100 which could signal that there is some upside potential. However, with a BoE rate cut ahead and the 50-day SMA remaining as staunch resistance at 1.4471, the pound may continue to remain range bound and prudent traders will employ appropriate strategies.
The dollar continues to find support from safe haven flows on the back of increasing concerns that the current global recession will deepen. Indeed, venerable investor Warren Buffett said that the U.S. economy will be in “shambles” for most of 2009 after his company Berkshire Hathaway reported its worst year in 44 years. The upcoming ISM manufacturing report will give markets some insight into future activity as the indicator is expected to remain in contraction for a thirteenth month and decline to 34.0 from 35.9. Traders will focus on the employment component of the breakdown as they look for clues into Friday’s Non-farm payroll report. Early estimates are that the U.S. lost over 600,000 jobs for a consecutive month which could be a weighing factor on equity markets during the week. The dollar index hit a three year high overnight and the prevailing risk aversion should keep it well bid throughout the week.
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Forex Trading Weekly Forecast - 03.02.09
[I]To discuss this report contact John Rivera Currency Analyst:[/I] [email protected]
