Euro - Tapped Out at 1.41?

[B][U]Talking Points
[/U][/B]- Japanese Yen: Fukuda voted as LDP leader ending political uncertainty

  • Euro: Industrial New Orders miss
  • Pound: 2.0300 proves resistance
  • Dollar: Only Fedspeak on tap

Euro managed to hit a new record high at the start of the European open tonight, but its upward progress was much slower as a new week began in the FX markets. After having catapulted past the physiologically critical level of 1.4000 last Thursday, the pair may well be in for a week of consolidation and retrace as currency traders consider the implications of the “super-euro” - its new nickname across the continent.
Last Friday?s extraordinary sharp decline in the flash PMI Manufacturing and Services readings sent shivers across the region. European business leaders are becoming concerned that a record strong euro and persistent problems in the credit markets which despite originating in United States hurt as many European financial institutions as Americans ones, are creating serious barriers to future EZ growth as exports begin to suffer and consumer demand lags.
Certainly, tonight?s release of EZ Industrial Orders did not help the euro bulls cause, as the number slipped worse than expected printing at -4.0% vs. -2.8% projected. Although the monthly numbers were soft, Industrial orders still managed to post double-digit gains on a year over year comparison, indicating that demand for goods remains robust. Nevertheless these figures are for the July period and future readings are only going to become more challenging as European manufacturers will have to deal with massive competitive disadvantages in costs, especially if labor wages begin to rise.
For the time being none of these considerations may matter as the euro trades on pure momentum. Furthermore, the EURUSD could continue to benefit from carry trade flows if US equities decide to challenge 14.000 level on the Dow and currency traders bid up EURJPY as a result as risk appetite increases. However, if equity markets hit a wall and begin to correct, risk aversion may become yet another factor in curtailing any further euro rallies.
This week brings a slew of economic data from the Eurozone, from IFO to Consumer sentiment to Retail Sales and FX markets will be focused on all those data points to gauge the impact of the recent strength in the currency on the economic performance in the region. Positive news could push the pair to 1.4200 and beyond, but a string of disappointments along with any weakness in global equity markets could put an end to this leg of the rally.
Meanwhile in Japan the LDP finally chose as its leader Yasuo Fukuda ending the uncertainty surrounding the selection of the next President. Mr. Fukuda?s appointment was expected and while it produced little positive impact on the yen, it helped to alleviate the sense of chaos that pervaded Japanese politics since Mr. Abe?s resignation. With political situation stabilized the yen may gain some strength if the economic data this week continues to demonstrate tight labor markets and an increase in consumer spending. But for the time being the BOJ is unlikely to move on rates unless it sees several months of improved fundamentals, therefore yen strength will continue to be dependent on any future bouts of risk aversion.