The EUR/USD Fundamentally

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Since the close on Friday there were still some interesting headlines from Europe. French president Hollande announced measures (mostly tax hikes) to meet the 3.0% deficit target in 2012. Press on a new complaint filed with the German constitutional court on the EMU bail-outs illustrates that the issue is not off the political calendar in Germany. However, for now the impact on EUR/USD trading is limited. Global markets today are focusing on poor Chinese imports. This continues to fuel the hope for more policy stimulation, not only in the US and in Europe, but also in China. Last week China introduced a massive infrastructure rebuilding plan to help get the economy back on track. Also the PBoC began laying the ground work for a stimulus program

 In theory, these pleadings should be a (slightly) further negative for the dollar. EUR/USD is seeing some very limited profit taking after the strong rally at the end of last week. The pair is again changing hands below the 1.28 mark. (Just a bit lower)

Later today, the calendar in both the US and Europe is rather thin. The French and Greek production data and the final Italian Q2 GDP are interesting, but no market movers. A similar claim can be made for the Troika briefing on Portugal. Markets will also continue to keep an eye on additional comments from German policymakers on the ECB bond buying plan.

Investors will also look forward to other events that are expected later this week. On Wednesday there are parliamentary elections in the Netherlands and the management of the EMU debt crisis is an important issue in the election campaign. The same day the German constitutional court is expected to rule on the Euro bailout fund. On Thursday, the focus will be on the Fed policy decision. The chances on more and substantial Fed easing have grown after last Friday’s payrolls report. The expectation for such a scenario will probably prevent any sustained rebound of the dollar before the Fed decision.

Let’s face it the EUR/USD will make very little moves before the FOMC announcements except for traders positioning themselves before the release. The odds are now over 3-1 that the FOMC will introduce additional QE, and this is already being factored in the dollar.

Last but not least, there is an EU/Eurogroup meeting at the end of the week.  The meeting probably won’t yield a high profile result. However, after the ECB fiat, EU policymakers now have to do their job on the framework/conditions to activate no new aid mechanism. This can yield again an interesting debate. So, from a EUR/USD perspective, there is again a lot of event risk. After last Friday’s strong gains, some consolidation, profit taking on EUR/USD can be expected. Dissonant comments from EU policymakers after the ECB decision and some uncertainty in the run-up to the Dutch elections and the German Court ruling might provide an excuse for this. However, we don’t expect a big leap higher in the dollar ahead of the Fed meeting, also not against the euro. At least for now, the focus is on the dollar side of the story. So, any EUR/USD correction will probably be limited and attract renewed dollar selling.

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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