Forex Signals

Foreign Exchange Strategy Alert - Establish Short EUR/USD

• There are increasing signs that the combination of the strong EUR, sharply higher energy prices, cumulative ECB tightening and weakening global growth are weighing heavily on Euro zone growth, with a risk of no ECB rate hike this year.
• At the same time, expectations for US growth and interest rate hikes have adjusted sharply lower, suggesting limited further downside for the USD.
• Accordingly, it is time to structure exposure for a gradual, but significant, decline in EUR/USD during the years ahead, and recommend establishing core short EUR/USD at 1.5920, targeting the January 22 low of 1.4365 with a two-day stop above 1.6250.
• It appears the shift in US interest rate expectations is near complete. At the same time, while there are ongoing concerns about the US financial sector, it is noteworthy that over the 4 weeks ended July 9, data on custody holdings at the NY Fed show that foreign central banks and official institutions accumulated $40.9 billion in US securities.
• The fall in the German ZEW confidence index to a record low in July highlights the sharp deterioration of confidence in future economic performance.
• Increasing energy costs and weakening export growth suggest that the EZ trade and current account balances are likely to fall further, and the weakening of investor confidence does not bode well for inflows of long-term capital.
• While EUR-denominated oil prices have been rising gradually since their low in early 2007, they surged 38% during 2Q 2008, creating new downside risks for consumer spending and business confidence.
• Although EZ oil-driven headline inflation is still heading up, even as the economy is turning down, the no-longer negligible risk of a recession will probably prevent any further ECB rate hike.
• Strong growth in the US export economy, there is the potential that Euro zone growth momentum falls below that of the US during 2H 2008, possibly extending into early 2009.
• Even with the current expectations for less than one hike by the FOMC and a small probability of another hike by the ECB, the surge in EUR/USD to a new record high today appears increasingly unsustainable. And a further shift in relative rate expectations later this year could push the 2-year swap spread well below 150bp, consistent with EUR/USD closer to 1.50 than 1.60.
• From a technical perspective it appears a triple momentum divergence could suggest an end to the EUR/USD upswing.
• The new record highs for EUR/USD set on April 22 and July 15 have taken place on declining relative strength. The series of new peaks on declining momentum would suggest the EUR/USD surge may have run its final lap.
• Given all above said, stablishing core short EUR/USD exposure is recommended.

  

  for more information