Friday 02/07/10: 1730: EURUSD – 1.2550: EURGBP – 0.8260 (Last week: EURUSD – 1.2290: EURGBP – 0.8244)

There is a lot to feast on this week, namely Jobs, Manufacturing and Housing. Overall, it shaped up with Euro strengthening against virtually everything as it ticked higher against the US Dollar. The Swiss Franc and the Yen were the safe havens as the Dollar sold off.

EURO/ DOLLAR
After trading range bound for several weeks the ranges finally broke with 1.2613 hit on Friday afternoon following US Jobs data. This push higher for the Euro is shown signs of sustaining the break above 1.25 as short Euro trades are stopped out. This occurs when investors betting against the Euro place orders to exit the position at certain levels, in this case 1.25. When the rate pushed above this, Euro buying orders bouy the price. This short stopping activity can bouy the Euro in the near term.

Earlier this week, the European Central Bank ended a €442bn lending facility which caused some worries initially. However, the uptake for refinancing from the ECB was a lot lower than expected (only €132bn for 3 month finance) giving the Euro a boost. This led to the start of the Euro’s march.

Poor economic data from the US also hurt the dollar. Pending home sales fell 30% in May, ISM manufacturing data fell more than predicted and a huge blow today (Friday) when Unemployment rose as the US economy shed 125,000 jobs in June, the first fall in 2010.

Outlook: Ranges have been broke and a rise in the EURUSD rate is feasible by more short covering in the short term. The clouds are gathering over the US Economy now with the key indicators of unemployment and home sales turning lower. With congessional elections coming up in November the Democrats need to give the economy a shot in the arm and a weakening currency could provide this. However, European structural problems persist. Trading range of 1.22 – 1.27 for the near term is expected.

Pound
The Pound had another good week, holding its ground against the Euro and Dollar. It broke the 0.81 mark against the Euro (18 month high) and peaked its head above 1.52 for the first time in 2 months against the Dollar. Why is this the case?

The UK is ahead of the curve when it comes to belt tightening and Economic recovery. The weak pound gave the economy a kick start late last year and it is still sailing on these winds. Growth in exports is starting to level off, mostly due to reduced consumer confidence in the Eurozone.

Outlook: The Pound still has more room to go upwards against the Euro and Dollar. It is only a matter of time before it hits the 0.80 mark against the Euro and should continue to move up against the Dollar as the picture weakens there. However, the UK are relying largely on the weak Pound to boost recovery so it is also only a matter of time before the BOE start talking it down. This is the only downside risk for Sterling.

Next Week
Sun – UK House Prices (Halifax)
Mon – European retail sales
Tues – US Services data
Thurs – UK industrial Production, German Industrial Production, Bank of England (BOE) Interest Rate, ECB Interest rate decision
Fri – UK Producer Inflation, German Consumer Inflation

Source: Blue FX Markets

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