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Euro Sags into the London Close, Traders Look Ahead

Posted by Joseph Trevisani on May 17, 2013 11:28:00 AM
At the London close traders have to be considering not just the end of this week but the likely condition of the euro over the next few weeks. Several factors have placed the united currency at the brink of a six week low (April 4, 1.2746), that if broken, would bring the currency into territory not frequented since November last year.

First the ECB's rate cut and subsequent comments from Mario Draghi, the President of the central bank, that more could be done if necessary, has brought the Europeans into line with the American and Japanese in seeking to foster  economic recovery by flooding their financial systems with liquidity.

If no one except the Japanese has specifically targeted their currency, the effect is and will be the same. When the yen falls the dolalr must rise. Since the Europeans are the latest at this game, the US has been running a zero rate policy and various types of quantitative easing for years, the ECB policy change is the newest, and consequently will have the most impact on the euro.

Second, the eurozone is firmly enmeshed in recession and whatever the infirmities of the American economy it is not expected to enter another downturn.

Finally, representatives of the Federal Reserve, have begun speculating again on the duration and even the end of quantitative easing. The US central bank has long championed policy transparency, letting the markets know by hints and statements,well in advance of any policy changes. If the US economy continues on an even keel for the next few weeks, that speculation will become louder and more evident in credit and currency market pricing. 

Traders will be asking themselves as they head home are any of these trends likely to change in next few weeks?


Joseph Trevisani

Chief Market Strategist


Chart: Bloomberg

ScreenHunter 1184 May. 17 12.00


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