Euro Lower against Dollar as Economic Data Weighs
The Euro showed signs of stalling in its three month uptrend against the US Dollar after economic reports gave the indication that unemployment in Spain is now seen at record highs and business confidence figures in Germany dropped on continued debt concerns. In other currency related headlines, the Japanese Yen (JPY) also met with selling pressure on the general expectation that the country’s central bank will put in place new economic stimulus measures at its October 30th meeting next week.
Risk sentiment is a good general indicator of how the Euro tends to perform and this week, the EUR/USD currency pair was lower by 0.7% to fall back below the closely watched 1.30 psychological level. The Euro was even lower against the generally weak Yen, with the EUR/JPY currency pair dropping 0.6% to trade at 103.10. This latter pair is still up by nearly 3% for the month, which is a suggestion that currency traders are looking to re-enter the much discussed carry trade after years of relative weakness.
Net shorts in the EUR/USD (according to the latest Commodity Futures Trading Commission data) have risen to 55,220 from 53,490 during the previous week. This tells us that a wider majority of the market is betting against the Euro but while this might seem to be a bearish indicator, the fact is that with fewer traders left available to enter into new short positions, there is some scope for gains next week if these traders choose to exit their positions and take profits.
German Business Confidence
Germany, the largest economy in the Euro area, released its latest IFO report (for the month of September), which came in lower than market expectations at 100 (from 101.4 previously). Market forecasts were actually calling for a rise in the report so the downside surprise caught markets off guard. The Expectations component of the report also showed weakness, as it appears German business are are weary of the lagging effect that is being created by the region’s debt problems.
The second major factor was the unemployment rate figures out of Spain, which actually managed to surpass the 25% level for the 3rd quarter (up from 24.6 percent previously). With jobless numbers still posting new highs, it is not altogether surprising that the business confidence report in Germany is also showing declines so as long as these types of numbers continue to disappoint, the performance in the Euro could be sluggish.
The EUR/USD is caught in a holding pattern, in the daily charts with a range forming in the 1.3160 to 1.28 area. We are seeing some higher lows on the shorter term time frames (which does suggest an upside break) but if we see an hourly close below 1.2830, this scenario goes out the window. prudent move is to wait for a clear decisive move either way before entering into new positions.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.