European agenda has possible problems on multiple fronts


The EUR, JPY and the DOW finish the week as the main stories during the overnight period.

Risk appetite continues in the US equity markets as the DOW set another record high in trading yesterday closing at 14,865. The S&P 500 moved to 1593.37. The equity markets were given a boost by better than expected jobless claim numbers. The US labor market has become the main focus of traders lately. The release yesterday seemed to ease concern of a slowing labor market recovery in the US. Traders now feel its a matter of time (today, maybe?) when the DOW hits 15,000 and the S&P 500 reaches 1600.

While equities are on the rise, other commodities are having trouble making gains. Gold has fallen into a range below the $1,600 level and crude oil is locked in the $92 -$95 range. As for the USD, a few weeks ago we spoke of the renewed correlation between the USD and the DOW. That correlation seems to have gone once again. While the DOW strengthened the USD did not. Adding to the USD woes is a report that the IMF will lower their US growth forecast for 2013 to 1.7%, down from the prior projection of 2.0%. The reason being given is concern that fiscal tightening may hurt consumption. It also released projections on the global economy, lowering that projection to 3.4% from 3.5%. Euro zone growth should remain the same, expected to contract -0.2%, while Japan’s growth forecast was revised upward to 1.5% from 1.2%.

Just as the DOW flirts with 15,000, the USD/JPY continues to inch closer to the 100.00 level. Late NY trading yesterday saw the currency stretch above 99.90, but it fell back and overnight highs barely touched the 99.75 level, before profit taking brought the USD/JPY back into the lower 99.30 region. The weaker JPY is helping the commodity currencies, AUD and CAD, remain bid and has also added to the strength of currencies such as the Mexican Peso and the South African Rand.

The EUR has moved lower in early European morning trade as traders are noting cross currency sales for the main reason. EUR/JPY sales seem to be leading the charge, pulling EUR down through the 1.3100 level. The single currency tested support at the 1.3060 level, but has since bounced a bit. Much of the EUR strength this week had been credited to cross currency purchases, so the move lower today is not surprising. Profit taking ahead of the weekend isn’t such a bad idea.

European finance ministers are meeting in Dublin today and the agenda includes possible problems on multiple fronts. The overall backlash against austerity measures could create problems for Portugal and Ireland bailout extentions and things are not all that well in Cyprus and Slovenia. Traders will definitely have an eye on this meeting.

Further reading: Forex Analysis: EUR/USD Stalls Climb Around 38% Retracement Level

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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