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What's Next for EUR/USD? Next Month Will be Crucial for Dollar's Direction…

Tue, Jul 1 2008, 10:05 GMT
by Lena Manousarides

FXGreece

Another month is coming to its end with markets having trouble adjusting to recent economic events. First of all, June was a very important month for the European Central Bank, as it celebrated its 10th anniversary. In the ten years which have passed since the formation of the ECB in 1998, its main goal has remained unchanged: to maintain price stability in all Euro-area nations and assist its steady economic growth. Team Trichet have managed to make the European economy one of the strongest in the world by raising the interest rates slowly but surely from 2% to today’s 4%. Last year’s favorable economic data allows for further increases with a view to making the Euro one of the strongest currencies in the world, and in the last four years, the EUR/USD has appreciated considerably from 1.20 to the recent all-time high of 1.60

The month started profitably for the dollar thanks to comments from Chairman Ben Bernanke that the US economy is getting stronger, plus the high levels of inflation, something which the bank doesn’t like and will do everything in its power to avoid. These comments were taken by the markets as a FED warning that interest rates won’t get any lower, but on the contrary the bank may raise them in the coming months. This alone was enough for the dollar bulls to take over once again and send the pair down towards 1.54.

But, when we started saying that dollar is staging a comeback and more dollar strength is coming, Mr. Trichet acted and took away the entire dollar’s recent progress. The European Central Bank left its key rates unchanged in the last meeting but in the press conference that took place after the decision, Trichet was more than hawkish and his words were so powerful and unexpected; the EUR/USD experienced a big push up towards 1.57. The pair skyrocketed from 1.5370 all the way up to 1.56 as markets were caught by surprise when Trichet not only indicated no cuts were in the bank’s plans, but a raise may come as early as next month. This is not something Mr. Trichet and his pals are in a habit of doing and therefore were welcomed with Euro buying all across the board. The fact the bank said it “is in a state of heightened alertness”, in combination with higher inflation and a need of raising rates, drove the Euro bulls to push the pair towards the recent highs.

There is a lot of speculation whispered around trader’s desks that Trichet planned his words very carefully regarding future interest rate hikes, at a point when the Euro was getting slammed all across the board due to dollar strength and bad Euro zone economic data. Many say the ECB doesn’t want a weak Euro and their plan is to make the European currency the strongest in the world. Whatever the case, one thing is for sure: after Trichet’s comments, it will be very difficult for dollar bulls to take control again and despite what Bernanke said about inflation, it will take more than a few comments to restore any confidence regarding the US economic recovery.

Another factor for the dollar’s weakness can be found in the recent oil appreciation, which on Friday saw a move of eleven dollars. The oil printed new record highs due to recent Trichet comments and other geopolitical reasons. The next target for the oil seems to be $150 per barrel and if dollar continues to be sold off, we could see $150 sooner rather than later!

The fact the DOW JONES printed big losses on Friday certainly put risk aversion back in the game, and therefore we could see some selling in all yen related pairs, with USD/JPY potentially breaking lower and GBP/JPY maybe a good sell opportunity at 209 (a strong resistance level) for a move towards 205 I the next coming days. All this will depend on this week’s data and if there is further weakness in stocks.

Let’s not forget the G8 meeting that we had last weekend, where the finance ministers and central bankers gathered in Japan to discuss recent world economic developments. The conclusion of this meeting was that high inflation is affecting most world countries due to high oil and food prices. There was a lot of talk and speculation that Saudi Arabia will raise its oil production but that was later denied from Iran which said that oil production is sufficient and the reason for oil rise was purely speculative.

The EUR/USD broke important resistance levels and as long as it trades above 1.5450, it’s looking for further strength. Next resistance is at 1.5620 and a clear break puts 1.5660-1.57 as the next target for the pair, however, before the continuation of the move up, there may be a slight correction downwards to 1.54, as many Euro bulls will want to take advantage of buying on dips.

The last important economic event of this month will be next week’s Federal Reserve interest rate meeting which will definitely determine the next market move. The analysts predict that Bernanke will leave interest rates unchanged, but there is a lot of speculation that the bank will eventually raise its rates due to high inflation. The comments after the decision will play a big role in all market movements and if indeed there is a hint that rates will be raised as soon as next month, the dollar will appreciate against all currencies and therefore the stock markets will fall.

All these events affect Greece’s economy, which although has made progress in the last few months, as the latest economic data printed better than expected numbers, one thing remains certain: high oil and food prices are a great concern amongst the consumers and if that continues through the next few months it will dampen the economic outlook considerably.

Published on  Tue, Jul 1 2008, 10:09 GMT