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EUR/USD Briefing

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Inflation VS Growth

Tue, Mar 11 2008, 09:02 GMT
by Nexum Team

Nexum Capital Markets

“Inflation VS Growth”

(ECB and FED seem to have different approaches)

---FOMC will meet next week, Inflation gets higher importance this week---

EUR/USD continued to push higher and higher last week. We got to a record high of 1.5465, this is pretty close to the psychological level of 1.5500. Profit taking and short entries is probably what stoped the Euro from reaching it. No good news for US and no indication that ECB will cut rates any time soon is keeping the EUR/USD over 1.5300. However the market is anticipating a 75 bps cut next week by the FED or even a 100 bps cut. This would be very aggressive and the CPI release at the end of this week will give us a good glimpse to know if it will be possible to see a full point cut next week.

Fundamental indicators will begin on Tuesday with Trichet appearing and probably continue to talk about the importance of Dollar strength and how they will continue to focus on inflation and then on growth. We also get the Zew Survey both for Germany and Euro Zone, as well as the Current Situation. All of these releases are expected weaker than previous ones. This is no surprise due to the current global situation, where weakness un the Euro Zone might continue to grow, and it will continue to pressure central bankers into considering a rate cut for further meetings(which means a return to USD normal levels). Thursday will show numbers for a weak Retail Sales month in the US, this might probably give another chance for Euro Bulls to push higher. Finally on Friday we get CPI for Euro Zone, expected to read higher and thus confirm the expectations of the ECB that focusing first on inflation is the best thing they can do. On the other side we get CPI for US as well as core inflation, they are expected to read a bit lower or the same as previous year, this will also confirm the posture of the Fed into cutting rates to incentive growth and later worry about inflation. The question now is, which is better for the Dollar, High inflation of Low inflation? High inflation would keep some bank officials from voting further rate cuts; at least they would not cut more than 50 bps next week. However if we get low inflation this would signal that the Fed is actually doing things the right way, they would cut more aggressively but this would also help them get out of the now imminent recession. We’ll have to wait and see how the market reacts to releases.

The technical side is beginning to create a strong roof near the 1.55 level. This psicological level is triggering profit taking and short positions so we now believe that unless something substantial happens next week in the FOMC meeting, we will hardly see a price much over 1.5500. If we are getting to a extreme in the price action, we might as well begin to prepare ourselves for the ride to the other side, this would be the south side and EUR/USD surely has a lot of space to go south. Remain Focused and be patient.

EUR/USD

Market is waiting anxiously for any indication of how much will the Fed cut rates next week. CPI will give us a good look into what reasons could FOMC members have to act aggressively or act cautiously. EUR/USD is reaching a very strong top so expect any good news for the US, specially any sign that ECB could cut rates any time soon to trigger a sell off and get the pair below 1.5000.

Daily Graph

• Take Profit 1: 1.5350
• Take Profit 2: 1.5225

Published on  Tue, Mar 11 2008, 09:16 GMT