Forex Trading

The Euro consolidated NY session gains in overnight trading, with EURUSD oscillating in a wide range above the 1.28 level. The pair ended the last trading day above near-term resistance, opening the door for a move to 1.33. German Industrial Production is set to fall to 17-year lows in European hours, underscoring fundamental weakness that suggests the upswing is corrective in the context of a larger downtrend.

Key Overnight Developments

• Australian Unemployment Rate Hits 4-year High at 5.2%
• Euro Consolidates, British Pound Extends Gains vs. US Dollar

Critical Levels



The Euro consolidated NY session gains in overnight trading, oscillating in a wide range above the 1.28 level. The British Pound extended bullish momentum, testing as high as 1.3921. The US Dollar Index has broken below support at intersection of 2008 high and rising trend line based from 12/18/08 low, opening the door for significant bullish corrections in EURUSD and GBPUSD.

Asia Session Highlights



Australia’s Unemployment Rate rose more than economists expected, printing at a 4-year high of 5.2% in February from 4.8% in the preceding month. While the economy gained 1.8k jobs (versus expectations of a -20k loss), the improvement came courtesy of a 55.6k rise in part-time employment. Meanwhile, full time positions fell -55.8k, completely erasing the previous month’s 37.7k gain. On balance, the net shift from full-time to part-time employment means fewer working hours and thereby implies downward pressure on wages and consumption, the largest component of overall economic growth. An index of leading indicators compiled by the Westpac Banking Corp suggested the economy will shrink at an annual pace of -1.2% in the six months to June while the National Australia Bank said they expect the output will shrink 1% through 2009.

Euro Session: What to Expect



German Industrial Production is set to shrink for the fourth consecutive month in January, bringing the annual pace of decline to a 17-year low of -15.5%. The down print comes courtesy of tumbling overseas demand: manufacturing is Germany’s top export sector and Factory Orders fell a staggering -37.9% in the year to January. Earlier this week, Germany’s Current Account posted a much narrower surplus than was forecast (4.2 billion euro versus 9.2 billion expected) as exports fell -4.4%. Weak overseas sales are likely to push firms to continue to cut capacity, sending the unemployment rate above 9% for the first time in over 2 years by the end of 2009. This will continue to weigh on consumption and overall growth even as the economy descends into its deepest post-war recession.

The implications for the Euro are twofold. On the trade side, stagnant exports in Germany and throughout the Euro Zone have pushed trading terms 67.3% lower through 2008 all the while the US trade gap has considerably narrowed, with December seeing the smallest monthly shortfall in nearly 5 years. From a long-term perspective, this implies a net outflow of money from the regional bloc and into the States, making for structural downward pressure on the EURUSD exchange rate. On the broader economic growth side, continued turmoil may mean that the ECB will follow other top central banks into quantitative easing. Bank president Trichet signaled the latest 50 basis point reduction to a record low of 1.50% marks a likely shift to a neutral bias but added that policymakers would study “additional non-standard measures”. Going down this road would expose the Euro to the same danger that now faces the Fed and BOE: manually boosting the money supply could prove inflationary and weigh on the currency if the central bank does not drain the excess liquidity with rate hikes fast enough when the recovery is in sight. The risks are to the downside considering policymakers’ recognition of a rebound tends to lag behind its actual beginning. On balance, the fundamental picture suggests that although today’s euro rally has likely opened the door to a meaningful near-term upswing, the move is a correction in the context of a larger down trend. Additional clarity on where the ECB is headed from here may come as the March Monthly Report is released at 09:00 GMT.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Gains Likely Corrective, Trend Remains Bearish Against US Dollar (Euro Open)