Tuesday, September 1, 2009

Comprehensive FX and Futures Research

The EUR/USD is heading south towards the lower end of its weekly trading range after U.S. Core Durable Goods Orders came in two basis points below analyst expectations. The durable goods number is outweighing a better than expected German Ifo Business Climate release. Referring to yesterday’s post, we explained that U.S. demand for durable goods has a strong influence on the EU economy since EU GDP is highly reliant on exports and manufacturing. Hence, investors are sending the EUR/USD lower since the Core DGO release takes a bite out of the optimism surrounding the concept of an economic recovery. However, the Euro is holding up a lot better than the Pound since Germany’s Ifo Business Climate release continues the theme of stronger than expected economic data from the EU over the past couple weeks. One needs to look no further than the high flying EUR/GBP for confirmation of a strong Euro. The Euro will be tested tomorrow since the EU will print Germany’s Prelim CPI and the EU region’s M3 Money Supply. Weak CPI growth and a large contraction in the EU’s money supply has been a thorn in the EUR/USD’s side. Declining prices and the dwindling supply of Euros gives the EU little room to tighten its monetary policy. Hence, the EU’s commitment to keep liquidity in control comes at a cost. Meanwhile, the Core DGO number is not the best way to set the table for tomorrow’s key releases, most notably America’s Prelim GDP and Unemployment Claims data. If these two data releases also disappoint, the S&P futures could experience a brisk selloff and result in a broad-based appreciation of the Dollar. However, the continuation of the theme of stronger than expected data from the EU could help the Euro maintain its relative strength. As for today, we could witness continued preference for the Dollar as investors head for safety. However, if New Home Sales come in better than expected later this morning, the EUR/USD can regain its footing and consolidate ahead of tomorrow’s wave of key economic data. On the other hand, weak New Home Sales would only perpetuate the EUR/USD’s present pullback. The key for the EUR/USD will be staying above our 1st tier uptrend line. If not, the currency pair could head for its next technical cushion, 8/20 lows or 1.42. Meanwhile, the EUR/USD is experiencing multiple trend line inflection points, indicating today’s session could turn out to be a volatile one. Since the session has started off on a sour note, this combination of events may not bode well for the bulls. As for the topside, our 2nd-4th tier downtrend lines continue to serve as important technical barriers preventing a large breakout in the EUR/USD. Since data is already mixed today, positive New Home Sales data may not be enough to send the EUR/USD to a break out to the topside.

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