Euro Up Big on Speculation U.S. Economy Will Weaken

The EUR USD is trading sharply higher overnight as speculators increase bets the U.S. economy will continue to weaken.

The EUR USD is trading sharply higher overnight as speculators increase bets the U.S. economy will continue to weaken. Traders are basing their expectations in part on U.S. economic reports this week which are expected to show a slower than expected recovery.

Today, existing home sales may show a slight increase in October, but tomorrow’s revised GDP could be cut below the 3.5% increase presented last month. Among other concerns for investors are high unemployment and foreclosures. Recent reports have showed the U.S. economy is losing momentum which indicates a long, bumpy road to recovery.

Overnight, traders are reacting to news that the Fed will keep its stimulus measures intact and interest rates low beyond the announced March 2010 date. This is triggering the rally in the Euro as speculators believe that the European Central Bank is in a position to begin removing its stimulus from the market.

Yesterday, Federal Reserve Bank of St. Louis President James Bullard said that he supported extending the Fed’s mortgage buyback program beyond March 2010. The dovish language recently used by the Fed is helping to drive the Dollar lower and demand for riskier assets higher. Bullard’s position was based in part on his analysis of unemployment and labor markets. He said, “unemployment is high, and labor markets are lagging.” During a holiday shortened, low volume week, this type of comment can go a long way as seen by the punishment the Dollar is taking overnight.

Bullard’s comment along with speculation the ECB may begin to withdraw stimulus measures has put the Euro back on a path toward $1.5000 or perhaps even a test of the high for the year at $1.5063. Now that some central banks are close to lifting stimulus measures, investors are starting to use more traditional analysis to position themselves in the Forex market. This means interest rate differential analysis. At this time with the ECB holding interest rates at 1.0% and the Fed maintaining historically low rates, the best return is in the Euro. This is another recent why this market should rise.

Unless the ECB steps in to talk down the Euro or use more aggressive tactics to weaken its currency, a new high for the EUR USD is inevitable.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More