Yesterday’s trading was very range bound with GBP/EUR, GBP/USD and EUR/USD moving within a 40 pip range for most of the European session. As it was a US holiday yesterday trading volumes were reduced and data releases were thin on the ground. This morning there’s been a bout of Dollar weakness pushing EUR/USD back firmly into the 1.27s. Do I think the EUR/USD pair will continue to climb? It may push as high as the early 1.28s however I still maintain we’ll see further EUR weakness in the coming sessions and over the course of the coming weeks and months ahead. I feel this year will be a story of US Dollar strength and we’ll see EUR/USD down to the 1.20 level, or even below, coupled with, in my opinion, the irreversible problems in the Eurozone contributing to sustained EUR weakness.
We have the Greek PSI (Private sector involvement) talks resuming tomorrow and yet again noises are being made that “talks will succeed”. A sense of déjà vu permeates. There is still the possibility that talks will fail and we could have a messy Greek default. When push comes to shove will Greece get their money? Of course they will. The alternative is too disastrous to comprehend however there is more and more noise in the market that a return to the drachma is imminent. The downgrades by S&P were well flagged so a lot of the moves were already priced in however the next issue alongside the Greek talks that the market was watching was the EFSF bailout fund with rumours that it may lose its triple-A rating with S&P. Last night it did, from AAA to AA+.
With the downgrades by the S&P signalling that they think things will get worse in the Eurozone before they get better I don’t see any argument for not being short of EUR/USD at present. If you’re a buyer of USD from EUR I’d look to hedge some of your risk at these levels. Look to work market orders and try and achieve the top of the trading range which I now feel is around the 1.28/1.2820 level. Indeed, the EUR hit an 11 year low against the Yen on Monday and EUR/USD was down to a 17 month low continuing the downwards trend for the EUR. This morning however EUR/USD is up on the back of strong Chinese data coupled with the T Bills auction later on in Spain. I wouldn’t expect EUR/USD to hang around too long at these levels and I still maintain that the downwards trend for the EUR will continue. Mario Draghi spoke last night, however he refused to comment on the Greek debt swap negotiations however he did note that Greece’s program is not delivering what was expected in October. Again, the old musings of “we’ll do whatever it takes” were mentioned however he also acknowledged that prospects in the Euro area are “dismal” and that the situation is “very grave”. He isn’t saying anything that no-one already knows.
This morning we’ve had a lot of UK data out in the form of CPI (YoY) and (MoM) coming in on consensus at 4.2% and 0.4% respectively. The Retail Price Index (MoM) (Dec) came in slightly better than expectations at 0.4%. The (YoY) RPI figure came in at 4.8%. We also have Mervyn King speaking at 10am that will have an impact on Sterling crosses. In the EMU we have CPI out and also the ZEW sentiment survey that is also released from Germany at the same time. This will give us an indication on the institutional investor sentiment on who is optimistic and pessimistic on conditions in the EMU and Germany. We’re fairly light across the pond in the US session with the only real data release of interest being the Bank of Canada interest rate decision at 14.00 UK time. Expect some volatility on CAD crosses this afternoon.
This is a pivotal weak for the EUR. I’m of the opinion that you’ll see EUR/USD in the 1.25s by the end of this week. It sounds like a big move however I think the concerns are building and the market is now looking to push the EUR lower. A main benefactor of this will be GBP. Contact to discuss utilising market orders on the GBP/EUR cross to maximise your upside on spikes in trading this week. You can also place what is known as an ‘OCO’ so you have a stop loss and market order; thus protecting your downside and allowing you to gain as much of the upside as possible on intraday moves.
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