End to Euro / US Dollar Decline Seen

Discussion on the Euro and US Dollar pair warrant a separate category.  However, currency trading nowadays is closely related to one another that it would be very productive to discuss the pair as a single topic.

Why the Dollar Remains Strong

The past weeks of trading saw the US Dollar still getting stronger against all other major currencies.  This is especially true if the US Dollar is paired against the Euro and Japanese Yen.  The question remains if there is a strong US data at hand, which will yield a negative answer.  Hawkish comments from the Federal Reserve are also absent.  This leads to the question why the US Dollar remains strong against other baskets of currencies.  The answer to this is the continuing bearish economic outlook being experienced by the Euro Zone.

This morning, the European Union revised their economic data for the Euro zone signaling an end to the robust growth experienced by the zone.  The revised 2008 GDP forecast for the Euro zone was set at 1.3 percent from the previous projection of 1.7 percent.  On the other hand, inflation forecast was pegged at 3.6 percent up from the previous prediction of 3.1 percent.

In similar development, the European Union cautioned its member countries that the 2009 forecasts could also have significant downward revisions.  The revisions could be attributed to the intensifying global headwinds and the continuing fragility of the world financial systems.

The European Union also said it does not see evidences of a wide ranging second round inflationary effect contrary to the statements made by European Central Bank member Juergen Stark.  The second round inflation is usually fueled by gains in the prices of commodities.  In effect, the EU is expecting the ECB to cut the interest rate benchmark for the Euro zone in the near future.

Dollar Extremely Overbought

The overnight index swaps or OIS of the Credit Suisse are pricing almost at 50bps reduction worth by the European Central Bank over the next 12 months.  This makes the odds favoring the Euro / US Dollar test prices of 1.40.  This is especially true as the overnight index swaps for more than 25bps in incremental raises was carried out by the US Federal Reserve within the similar time frame.  

However, according to the COT positioning at the Forex market and trading the US Dollar is being overbought by currency traders and speculators while the Euro is being oversold at the currency floors.  This particular trend is strongly suggesting that the risk vs. reward warrant for the green buck selling could be nearing its end point.   

The end point may come after news of the Import Price Index, the PPI, and Advance Retail Sales Data hit the news network on Friday.  The data will increase the event risk pick up.