Can the euro extend its gains (page 1 of 2)

DailyFX Fundamentals 05-16-08

By Kathy Lien, Chief Strategist of DailyFX.com

Big moves in the currency market

For the better part of this past week, the Euro, Japanese Yen and British pound have been trapped within a tight trading range against the US dollar.

Even though the moves today in all three of these currency pairs have been relatively significant, especially in the EUR/USD, they pale in comparison to the moves in the Australian and New Zealand dollars.

The Australian dollar hit a new 24 year high on the back of rising gold prices and rumours that China could invest in Australian mining giant BHP Billiton while the New Zealand dollar rallied more than 1%.

It has turned out to be a very active day in the currency market with the dollar first rallying on the stronger housing market numbers and then giving back all of those gains following the disappointing consumer confidence report.

Building permits and housing starts both rebounded in the month of April and although the numbers do reflect some stability in the housing market, we caution against becoming too optimistic. The increase in housing starts came primarily from a surge in multi-family developments, which increased 36% in April after falling 35% in March.

Consumers however are still suffering; confidence for the month of May hit a 28 year low as rising gas prices and tight credit markets hurts their pocketbooks of.

The average price of gasoline across the nation hit a record high for the ninth day in a row according to auto group AAA. In the past month alone, prices at the pump have risen 11% and since a year ago, prices have risen 22%.

According to AAA, gas is the most expensive in Alaska followed by Connecticut, with the average price of gasoline both exceeding $4 a gallon. The US economy still faces many threats, but there could be some respite in the coming month as Saudi Arabia pledges to boost oil production in June.

After having cut interest rates by 325bp, the recent rise in oil prices will force the Federal Reserve to keep their focus on inflation.

Although the big moves have been concentrated primarily in the commodity currencies this past week, we expect the volatility to spillover to the other pairs.

There are a lot of key Eurozone, UK and Canadian numbers due for release next week. From the US, we are only expecting producer prices and existing home sales.

Can the euro extend its gains

The euro staged a very strong rally against the US dollar today after quietly selling off for the past three days.

The move was due almost entirely to the US numbers as the euro started to gain strength quickly following the University of Michigan Consumer Confidence report. Eurozone economic data was actually bearish for the currency with the trade surplus swinging into a deficit in March.

This provides evidence that the strong euro is finally weighing on the region's economy. Eeropean Central Bank (ECB) officials continue to express their conflicting concerns about inflation and growth.

Governing Council member Vito Constancio said that it is difficult to predict how bad the Eurozone economy will get while Liberscher indicated that 3% inflation is unacceptable.

Fundamentals will be heating up for the euro next week with German producer prices, the ZEW survey, IFO and PMI reports due for release. We actually expect most of the numbers except for the inflation reports to be euro negative.