Euro: Becoming Overbought? (page 1 of 2)

DailyFX Fundamentals 11-15-07

By Kathy Lien, Chief Strategist of DailyFX.com

Dollar Strengthens But Is This Move Real?

The US dollar has strengthened against all of the high yielding currencies today, but have we seen the last of dollar weakness? Even though inflation and manufacturing data were decent, and gold prices plummeted as much as $30 intraday, the outlook for the US economy and US dollar still faces many risks. Consumer price growth was right in line with expectations but the fact that it did not surprise to the upside was disappointing enough. Manufacturing activity in the Empire State and Philadelphia region were stronger than expected, but this natural stimulus of dollar weakness has already been priced into the market. Jobless claims on the other were horrid, driving speculation that we could soon see a turn in the labor market. Troubles continue to plague the financial sector and US retailers are cautioning against a difficult holiday season due to higher food and energy costs and higher mortgage payments. The dollar is stronger today but that is primarily due to a sharp fall in commodity prices. The only thing that could save holiday spending for retailers is tourism. If Canadians and Europeans come to the US to do their holiday shopping, it would help to offset weaker domestic demand. Also, the dollar stands to suffer from reserve diversification. The central bank governor of the U.A.E said today that they may drop their dollar peg in favor of a currency basket including thee euro to contain inflation. Even though the reserves held by the U.A.E. are relatively small, if the move becomes official, it would be symbolically important because it suggests that other Gulf nations could follow suit. A rate cut by the Federal Reserve next month is still up in the air because the risks to growth are just as significant as the risks to inflation. We are expecting industrial production and the Treasury International Capital flow report on Friday; improvements are expected for both numbers.

Euro: Becoming Overbought?

The Euro is losing steam and is failing to react to stronger economic data or hawkish ECB comments. This suggests that at least in the near term, the Euro is becoming overbought and in order for fresh gains to be achieved, we need to either see a big downward surprise in US data or a big upward surprise in European data. Unfortunately we will probably not get either of this tomorrow with the Eurozone trade and current account balances being the only pieces of Eurozone data on the calendar. Consumer prices were right in line with expectations; the 2.6 percent annualized pace of growth explains why the ECB remains extremely hawkish and refuses to talk down the Euro. Even the French are now convinced that the region needs a stronger currency. The Bank of France said this morning that inflation vigilance is warranted and the recent rise in the euro is helping to limit the rise in certain prices. According to the ECB monthly report, the central bank "stands ready to counter upside risks to price stability as required by our mandate." We can't imagine more hawkish comments than these. However the Euro has not strengthened and we think that this may be partially due to EURJPY selling. Meanwhile Switzerland will be reporting retail sales tomorrow. A tight labor market should lead to stronger spending.

British Pound Extends Losses Following Retail Sales Numbers

The British pound extended its losses today following weak retail sales numbers.