NEWS / Foreign Exchange

EUR/USD Ready To Break 1.35?

With theEaster Holidays gone and traders back at their desks, we anticipate lots oftrading action this week after a few days of very low volatility.  Firstly, let??™s revisit last week??™s busycalendar including news from the ISM Manufacturing and non Manufacturing aswell as Non Farm Payrolls.

All weekthere was pressure on the dollar, with the greenback losing ground against mostcurrencies due to bad numbers from the ISM data and higher oil prices due togeopolitical risks. As we said in last week??™s article, what saved the day forthe dollar was the better than expected payroll data, plus the unemploymentrates dropping to 4.4% from 4.6%.

However,although the market moved about 40 pips, this was not strong enough to take theEUR/USD below 1.3330, mostly because of the Easter Holidays and the lack ofvolume in the markets.  Holiday Mondaywas a very slow day for all currency pairs, with the big move coming overnightwhen EUR/USD printed 1.3445 before consolidating back to 1.34.

This weekwe see euro bulls being in control with one thing on their minds: to revisit theall time highs of 1.3666; a level that was last reached at the end of 2004.  We had the FOMC minutes yesterday whichalthough hawkish, it was not enough to stop the dollar from falling againstmost of the other currencies. With EUR/JPY at all time highs 160.85 and currytraders back, the only thing that can save the day for the greenback are today??™srate decisions and the accompanying statement from Trichet.

With theECB??™s rate decision just around the corner, market players and analysts expectthe rates to be left unchanged.  However,will this be the Trichet statement that everyone is waiting for in order todetermine the future for the European Central Bank rates?  There is a lot of speculation that Trichetmight not be as hawkish as expected due to the higher levels of EUR/USD, justbelow 1.35-levels, which can hurt exports as the euro is tooexpensive.

We believethat once again ECB will make it hard for us to know what their future plansare and therefore they might try to buy time by being vague and unclear aboutmonetary policy. We are at a point where whatever Trichet says there will be ahigh level of volatility in the markets.  If he is dovish, euro will sell off and thereforedistance itself from 1.35, but if he is hawkish then 1.35 will be broken and arevisit to 1.36 could be inevitable.

Coming tothe end of this week, a slow one data wise, look for more volatility on Fridaywith the US Trade Balance being the main event alongside the PPI.  If we see more bad data out of US, the greenbackreally might continue its fall and the FED might decide to change its hawkishstance; at least for now.

So, enjoythe rest of the trading week and remember that many currency pairs likeAUD/USD, EUR/CHF, EUR/USD, EUR/JPY are at critical levels, therefore watchingthem closely is imperative if you are looking for a good level to trade.  Also this weekend we have the G7 meeting whichwe will be monitored closely for any mention of yen weakness and euro strength,plus any more insight in the dispute between Chinaand the slowing of the USeconomy.