Euro Hits New Record High (page 1 of 2)

DailyFX Fundamentals 11-21-07

By Kathy Lien, Chief Strategist of DailyFX.com

Currency Markets Gear Up For Another Rate Cut
The price action in the financial markets today reminds us of the price action that we saw back in August when the Federal Reserve shocked the markets by lowering the discount rate. Surprisingly, our wave déjà vu comes not from the sharp drop in carry trades but from the sharp moves in the bond market. Two year bond yields fell below 3 percent to the lowest level in close to 3 years. The five year TIPS yield, which is the spread between Treasury Inflation Protected Securities and the Treasury Bond Yield, fell to the lowest level in 2 years. This indicates that investors are rushing into inflation protected assets that carry no credit risk because their concerns about the US economy are growing. Part of that concern stemmed from Treasury Secretary Paulson's warning last night that home loan defaults in 2008 should be substantially greater than the defaults in 2007. Today's economic data confirms the trouble. Mortgage applications and leading indicators were both weaker than expected and even though jobless claims and the University of Michigan consumer confidence number were better than the prior period, they remain at levels consistent with weaker growth. With oil prices closing in on $100 a barrel, consumer spending could be particularly bad this holiday season. The prospect of more difficult times ahead has traders pricing in a 100 percent chance of a quarter point rate cut next month and a slim chance of a 50bp cut. Half a point would be too much too fast for the Federal Reserve so this option is basically obsolete. Meanwhile trying to figure out whether the US dollar will continue to weaken is not a difficult task. The US is the only major central bank actually lowering interest rates while everyone else is either on hold or raising them. Until another country begins to lower rates as well, the dollar's weakness could continue; our target is still 1.50 for the EURUSD. US markets are closed for the Thanksgiving holiday on Thursday. The next release Daily Fundamentals will be on Friday.

Euro Hits New Record High
The price action of the EURUSD over the past 3 months is a perfect example of why fighting the trend is far more difficult than joining it. Since the middle of August, the currency pair has appreciated 11 percent. The hawkishness of the ECB and the remarkable resilience of the Eurozone economy have contrasted sharply to the increasingly dovish bias of the Federal Reserve and deterioration in the US economy. Looking ahead, there is no immediate threat to further EURUSD gains. It is no secret that currencies are usually trending in nature and unless there is a reason for this trend to change, it probably will not. Even though the US markets are closed tomorrow, there are plenty of Eurozone economic data due for release. This includes the final third quarter GDP figures, the current account balance and industrial orders for the month of September. Unfortunately don't expect these numbers to be very market moving. According to our 10 year analysis of EUR/USD price patterns on Thanksgiving, the average daily range is approximately 60 percent of the usual daily range for the currency pair. More specifically, the EURUSD has had an average daily range of 102 pips over the past 10 years, but on Thanksgiving Day, the average daily range is only 61 pips.

British Pound Falls to 4 Year Low Against Euro
The British pound fell to a four year low against the Euro following evidence that the Bank of England could seriously lower interest rates next quarter.