Will the Dollar do an about face on the EUR?

All it took was for a few key stop losses to be activated yesterday midmorning to get this market to act temporarily trigger happy ahead of Helicopter Ben’s all important keynote speech in Jackson Hole this morning. Even month end requests managed to make matters much easier for dealers. Global equities and the EUR had been trading heavy on bearish market sentiment; mostly driven by reports that Spain would delay any request for an official bailout. Also aiding the negative push is the IMF looking for more accommodative action from the ECB. Combined, it was reason enough to give this nervous market the thumbs up to sell the single currency ahead of key resistance points noted yesterday. However, not for the first time the EUR has failed to break out of this tight monotonous range. What we are currently seeing is a pre-Jackson Hole squeeze, where the market positioned for disappointment is feeling the pinch of profit taking. Asian Central Banks buying below 1.25 managed to get the ball rolling overnight, however, heavy selling interest seen above 1.2585+ should be able to put a stop to this rally.

Ben takes the spotlight midmorning and the jury is still deliberating on the outcome. Consensus is leaning towards no outright signposting of QE3 which will be very disappointing for those expecting a flat out announcement. It is suggested that his speech titled “Monetary Policy since the Crisis,” is more likely to address the costs and benefits of various policy easing alternatives, rather than to announce policy innovations. In this scenario, the “big” dollar negative move triggered by the dovish FOMC minutes last week could possible lead to some upside for the dollar against both the EUR and JPY. Maybe we are capable of breaking out of this well-defined EUR range ahead of the busy September schedule as investors reverse some of their long risk positions funded in EURs.

Some analysts expect the risk of markets being disappointed at next week’s ECB Governing Council meeting is fairly high. Much of the market expects the ECB to announce that it can intervene in the short-end of member states’ yield curves, up to around 2-years next Thursday, but give no details on specific yield or spread targets, or the scale of any buying. They also expect another-25bp rate cut and more details of the new collateral framework. If policy makers fall short in implementing these measures then we will have a market willing to offload their EUR disappointment aggressively and quickly.

Data from the world’s largest economies overnight was not ‘pretty.’ Japan’s manufacturing activity contracted in August to its lowest level in 16-months. The manufacturing PMI fell to a 47.7 from 47.9 in July. Even their IP dropped -1.2%, m/m in July, compared with +0.4% increase in June. The country’s jobless rate remained steady at +4.3% in July, while the jobs-to-applicants ratio continued to improve to +0.83. Their job situation is much healthier than the Euro-zone who are now looking at a record +18m people unemployed, a rate of +11.3%, up from a revised +11.2% in June. Rising unemployment adds to the evidence the euro-zone economy is losing momentum and will not pull out of its downturn any time soon, as government taxes rise and spending cuts aimed at curbing debt levels also suppress economic activity.

German retail sales also fell in July (-0.9%), the market had been expecting a marginal headline rise, as consumers become concerned with the deepening of the euro-zone debt crisis despite their own strong domestic labor market. In inflation adjusted term, the year-over-year print managed to also fall in July by-1%. Analysts also note that the retail sales number is generally prone to revisions due to a change in the polling method. German confidence numbers already this week imply that the once insular German consumer is becoming increasing worried about the Euro-zone debt crisis and the future affect it will have on their own lives.

The EUR market remains in overbought territory, consolidating below the 30-upper Bolli-band now just above the psychological 1.26 handle, which if breached, could trigger another nasty short covering run like that seen earlier in the week. However, there remains natural layers of resistance up to the figure which should keep the natural bias to the downside. The retail sector, who have built up the largest net short EUR in some time, are in danger of being taken out of these positions a tad quicker if EUR upside momentum persists as they may have shorted the market a little too early. Perhaps the EUR is really starting to lose momentum with the lack of higher highs now stretching back to August 23?

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EUR losing momentum?