Friday 16/07/10 @ 15.55: EURUSD - 1.2940: EURGBP - 0.8435 (Monday: EURUSD - 1.2571: EURGBP - 0.8370)

The Dollar is selling off across the board with the sell off against the Euro capped at 1.3005. The US economy has again been talked down by the Fed, paring expectations for interest rate rises.

EURO/ DOLLAR
After a deluge of good news for the Euro last week it started the week on a negative note with a Moody's downgrade for Portugal and German Business confidence falling, suggesting the recovery story is peaking. The Euro rose, however.

What is taking place? Firstly, an eagerly awaited bond auction by Greece surpassed expectations and data also pointed to renewed Chinese buying of Euro denominated assets, particulalry Spanish Government debt. The key thing goes back to basics: interest rate differentials. The spread between the 2 year yield on the German Bund (a proxy for European interest rates) and the 2 year US Treasury is narrowing as the US yield is falling. As the US yield falls, less people will wish to hold the US Dollar and sell. Hence USD has fallen 4% since Monday against the EUR, 2.7% against the Pound and a 2.8% decline against the Yen.

The state of the US economy was cited as a 'relatively modest' worsening by the Federal Reserve who also hinted that further monetary stimulus may be required. I would probably suggest that talking down the US economy is part of this stimulus policy as it weakens the Dollar and hence boosts trade. Deflation was also referred to! Watch this space.

Outlook: The Euro has continued to defy negative calls made earlier in the year. It is on an upward trajectory with technical indicators pointing towards further gains now that 1.30 has been breached. On the upside the high 1.30 - 1.31 could feasibly be hit in the short term. Results of the European bank stress tests next Friday are the key event to watch, probably giving direction fo rthe rest of the summer.

EURO/ POUND
This cross has spurted upwards today after hovering with the 0.8350 mark for some time, reaching a 6 week high. News on UK house prices staying low through to 2012 hit Overseas Investors appetite for UK risk. As the markets moved towards a risk off stance going into the weekend the Pound suffered. Inflation data also edged lower in the UK, which reduces pressure to raise interest rates. 

Outlook: As with the Dollar rate, the Euro Pound rate is technically pointing higher and could test 0.85 in the coming days. Taking a step back and looking at the medium term, it is likely to move lower and average 0.83 for the remainder of the year.

Next Week
Tues - German producer Prices, US Housing starts
Wed - Bank of England minutes (watch for number of members voting for rate rise)
Thurs - UK Retail sales, US Initial jobless claims, Existing home sales
Fri - German IFO business confidence, European Bank Stress Tests (possible turning point for Euro as best case scenario seems to be priced in already)

This report is for information purposes only and should not be used as specific buy or sell advice.

Source: Blue FX Markets

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