Euro Hits Record Highs, Can it Break 1.50? (page 1 of 2)

DailyFX Fundamentals 02-26-08

By Kathy Lien, Chief Strategist of DailyFX.com

What Drove the US Dollar to a Record Low?

It has been a record breaking day in the financial markets with the US dollar falling to an all-time low against the Euro and crude oil futures closing at a record high. Although US Consumer confidence dropped to a 5 year low, that was not the primary catalyst for the dollar's slide. Instead, the downward spiral was triggered by the combination of things including comments from Federal Reserve President Kohn, stops being taken out at the prior high, weaker consumer confidence, stronger Eurozone economic data and concerns about what Ben Bernanke will say at his testimony on monetary policy tomorrow. Kohn has already warned us that the central bank will do what it takes to fight a recession. With foreclosures rising 90 percent in the month of January from the same period last year, consumer confidence tanking and oil prices hitting new highs, it is absolutely necessary that Ben Bernanke makes growth his top priority. We doubt that the Senate our House panels will allow him to get away with talking about price pressure when most of their constituents probably feel like the US economy is already in a recession. Therefore even though the annualized pace of producer price growth rose was the fastest pace since 1981, the impact on the US dollar was limited because the market quickly realized that right now, stronger inflationary pressures will not stop the Fed from continuing to lower interest rates. The futures market is still pricing in a 50bp rate cut for the March 18th monetary policy meeting and recent economic data suggests that the US central bank cannot afford to slow down. The price action in the US dollar today clearly indicates that this is what the market expects Bernanke to tell us tomorrow. New home sales and Durable Goods orders are also due for release. Existing home sales were stronger than expected, but new home sales should remain soft and even if it rebounds, it will not help the dollar much because either inventory will rise or prices will fall, or both. As for durable goods, after increasing 5.2 percent in the month of January due to non-defense aircraft sales, a healthy decline is expected.

Euro Hits Record Highs, Can it Break 1.50?

The Euro hit a record high of 1.4983 against the US dollar which is a tease for many traders who are itching for a break of 1.50. We are sure that a number of stops and option barriers at the 1.50 level is the primary reason why the EURUSD is having such a difficult time breaking it. This tells us that if and when the break occurs, the extension should be sharp and rapid. We do believe that a break of the 1.50 level is just a matter of time. In fact, all month we have been calling for a test of the record highs. Like the ZEW survey of analyst sentiment, the IFO survey of business confidence also improved in the month of February. With the European stock market stabilizing, Germans are feeling more confident that the policy actions enacted by various central banks will be enough to stabilize the financial markets. Fourth quarter GDP in Germany was right in line with expectations, but some of the subcomponents were weaker than expected. Tomorrow Eurozone money supply and German import prices are due for release. The largest nation within the Eurozone is also expected to be hit by rising food prices. Yesterday, wheat prices climbed a whopping 25 percent in one day which will lead to another round of inflationary pressures.