A Forex View From Afar

Euro and Pound analysis

Written by A Forex View From Afar on Sunday, July 13, 2008

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A heavy calendar awaits the euro, and in general most currency pair next week as a lot of red-noted releases are scheduled almost every day, but the core will be on Tuesday and Wednesday; Retail sales, Mr. Bernanke testimony, and soon after that the CPI and PPI releases from both areas, then we have the FOMC minutes - every one of this releases has the potential to completely shift the market sentiment, especially as they will be released one after the other.

The euro had a very strong week (well a strong friday actually), gaining nearly 250 pips as the whole market was dumping dollar, especially in that last days when the market remembered that the credit crunch isn’t over and that the financial institutions are close to crawling on their knees. In this climate, the euro managed to break above the 1.58 resistance that had held down the pair for some time, and close the week in the 1.59 area. If all of this would have happened on Wednesday and not Friday, we would probably be speaking about a new all times high on the euro, and about the ECB preparing some jawboning so that we could all jump on the short side of things.

The question that arises now is how long the euro can keep this valuation. On one side, we have the US economy which it seemed had bottomed, with the worst behind it (although the future isn’t exactly too bright, or too clear, either). On the other side we have the Euro-zone, a 15 strong group of countries whos economies seem to be slowing. The major distress is that a euro zone slow-down is not yet in the pair’s valuation, although trade desks should slowly start to price it in.

The chart shows that the euro is trading in a regression channel and we just hit the middle line of it. It can clearly be seen how strong the support trend-line is, since the pair never wasted too much time near it, or had ever the strength to break it. Also, it can be clearly be seen that the euro likes to trend until it hits a”.00” resistance area. First it was 1.5000 when the pair needed a lot of momentum to break higher. Now it’s 1.6000




The pound’s long term outlook certainly remains on the downside as the UK economy seems to follow very closely the US, and it has not yet gone through what the U.S. looks to be coming out of. That is the main difference between the two economies, the US is near the bottom phase, while the UK is one step away from the contraction cycle.

The pound has a very heavy calendar this week, especially in the first three days of the new trading session. There will be the CPI and PPI reports, which would probably show inflation is building up undisturbed, and the housing numbers which will bring back to reality any pound bull.

House prices fell the most since 1993, consumer confidence hit an 18-year low, while the service, manufacturing and especially the construction parts of the economy are contracting at an increasing speed. The only indicator that is holding tight is retail sales, which easily beat estimates, but now everyone expects a major revision from those numbers as well. All of this points to the UK central bank probably following the Fed’s footsteps in the next months. A cut may be on the table and will probably start to be seen soon in the pound’s market valuation. Some analysts even say that another financial UK company will need a bail-out pretty soon if the credit market keeps deteriorating.

In the last trading days the pound was dragged higher by the whole market, all week gaining only 40 pips, and closing just underneath the 90 moving average. The pair has traded in a wide channel for almost half of year, but we will follow the “sell” side of this pair in the following weeks, but hopefully after one surge higher that fails at 2.0050.