Daily FX :: Euro Holds the Bounce

Euro Holds the Bounce

Written by Boris Schlossberg Senior Currency Analyst
Tuesday, 07 June 2005 GMT
Because of a very light economic calendar trading tonight is dominated by
official commentary which is providing a mild bid tone to the EUR/USD.
Overnight, Chairman Greenspan failed to inspire the markets with cautious
wording that clearly reflected his concern over the latest weak NFP
numbers as well as frustration with the continuous flattening of the yield
curve in the bond market.

A flat yield curve occurs when the longer dated fixed income securities
trade at a very narrow spread to the shorter term instruments and
indicates that the market is anticipating a slowdown or even a recession.
Mr. Greenspan’s comments last night offered no strong arguments to combat
that opinion, so the FX market seized on the idea that Fed rate hikes may
top out at 3.5% in a few months time which would be dollar bearish because
it would cap the carry trade advantage the greenback now enjoys against
the yen and the euro

On the euro side, comments by Michael Deppler Director, of the European
Department of International Monetary Fund that the ECB may not need to
lower rates just yet, helped convince the market that the euro yields will
not fall in the near future. Mr. Deppler noted that that if growth does
not pick up by Q3 then a cut would be valid. “It is appropriate for
Eurozone rates to stay on hold as the slowdown seems temporary”, he said.
According to analysts at IFR this idea appeared to have been the best
compromise yet between those looking for rates to be held and those who
urge the ECB act quickly and helped to buoy the euro in morning trade.
Incidentally, Mr. Deppler also stated that 1.20-1.30 range was just about
right for the pair, a view with which we concur as we believe the EUR/USD
will now enter a protracted period of consolidation and range trading
because neither currency offers strong value.

Meanwhile both yen and pound have also rallied against the greenback
despite less then stellar eco data overnight. In Japan, Household Spending
declined to –3.0% on year over year basis – more than the –2.0% projected
drop. Japan remains gripped in the hands of deflation and progress is
small and slow. In UK the worst decline in housing prices in 7 months did
not prevent sterling from reaching the 1.8300 figure only 2 days after it
nearly broke through the 1.8100 level. The dollar is overbought and it
look like the market will be a lot more forgiving towards the majors this
week than the greenback.