Here’s another one from Kathy Lien today on the US dollar vs. the Euro.
5 Reasons Why the US Dollar Will Not Hit a New Low
Despite the prospect of a rate hike from the European Central Bank, here are 5 reasons why I do not expect the US dollar to hit a new record low against the Euro:
1) Tug of War Between Bernanke and Trichet
Fed Chairman Ben Bernanke and ECB President Trichet appear to be competing for the Title of Most Hawkish Central Banker. Both Bernanke and Trichet have repeatedly warned to the markets that inflation needs to be their number one focus. On a near daily basis, we have heard fresh hawkish comments from either themselves or their cohorts and their message is growing stronger by the day. With Mishkin’s resignation, the balance of FOMC board members now shifts towards hawks. The tug of war between the ECB and the Fed will make it difficult for the EUR/USD to break out of its 1.5350 to 1.5850 price range.
2) Current Economic Data
Furthermore, in both the US and the Eurozone, we have seen improving economic data. Yes, non-farm payrolls on Friday was very weak, but at the same time, earlier this week, pending home sales increased significantly. The service and manufacturing sectors are also showing signs of stabilization. As for the Eurozone, the German trade surplus increased more than expected due to a surge in exports while industrial production rose in both France and Italy. With economic growth failing to spiral give both central banks the flexibility to focus on inflation.
3) Outlook for Growth
The outlook for both US and Eurozone growth are both uncertain. Oil prices and a weak labor market is expected to prevent a major recovery in the US economy. As for the Eurozone, the yield curve for German government bonds has now inverted. The 2-10 spread turned negative for the first time since 2000. In the past, inversion of 2-10 spread is a strong leading indicator of serious downturns and recessions.
4) Speculators are Indecisive
The FXCM Speculative Sentiment Index, which measures the positions of the firm’s most speculative clients has also been flipping from negative to positive over the past week, which is a strong sign of indecision and a confirmation that range trading dominates in the EUR/USD for the time being.
5) G8 Meeting and EU Referendum
And finally, the EU Referendum on Thursday and the G8 Meeting this weekend should prove to be non-events. Even though a change in the currency portion of the communique (or intervention) was originally expected, an official indicated this morning that currencies will be discussed but won’t necessarily be mentioned in the communique. The EU Lisbon Treaty on the other hand is far less important than the EU Constitution that was eventually rejected in 2005. If Ireland votes No on Thursday, the best we will see is mild Euro weakness.
For these 5 reasons, I do not expect the EUR/USD to break out of its range or hit a new record high anytime soon.
