Weak U.S. Economic Data Driving Force Behind Euro, Pound Rallies

The U.S. Dollar was crushed on Thursday by asoaring Euro and British Pound. Economic worries pressured the Dollar all dayas investors left the greenback in favor of the currencies backed by thestronger economies.

The U.S. Dollar was crushed on Thursday by a soaring Euroand British Pound. Economic worries pressured the Dollar all day as investorsleft the greenback in favor of the currencies backed by the stronger economies.The fact that the U.S.is still wallowing in debt while the European and British governments talkabout austerity measures and cutting costs may have also contributed to theweakness in the Dollar.

Because of the sharp sell-off in the Euro and Sterling earlier in theyear, some are attributing the current rally to a short-squeeze. In otherwords, bearish investors are being forced out of the market not by freshbuying, but by short-traders scrambling to get out. In this case, it’s not theweakening U.S. economydriving traders into the Euro and Sterling,but rather short traders paying anything to protect what’s left of theirprofitable positions from the Spring.

What is clear at this time is that the U.S. economicdata continues to show weakness. In addition to the actual released figures,economists are contributing to the weakness by downgrading U.S. growthtargets.

Less than one day after the Fed said that GDP would slow andthe jobs outlook would remain sluggish, more bearish data was released onThursday. Today the New York Fed’sEmpire State Survey fell to 5.08, its lowest reading since December. Also thePhiladelphia Fed Manufacturing Survey declined to 5.1 in July, well below pre-reportguesses of 10.0, reaching its lowest level since August 2009.

Although industrial production posted a more than expectedgain of 0.1 percent, the core manufacturing component fell 0.4 percent, morethan expected and the first decline in four months. Finally, the thirdconsecutive monthly decline in producer prices renewed concerns about adeflationary scenario developing.

This week a plethora of data along with a dovish Fed outlookis pointing to a weaker economy which is likely to keep the pressure on theDollar. Interest rates are also expected to remain low for a prolonged periodof time since the latest inflation data suggests the Fed cannot move themhigher. Furthermore, there is renewed talk of new stimulus measures which willmean more Dollars flooding the markets. All of this is prompting a call for aweaker Dollar over the near-term. This was particularly event in the Euro andBritish Pound on Thursday.

The EUR USD surged to the upside on Thursday as acombination of weak U.S.economic data and better than expected demand for Spain’s debt triggered a sharpbreakout to the upside. Before the U.S.markets opened, the Euro was receiving support from the news that Spain raisednearly $3.85 billion in 15-year bonds.

Technically, today’s rally in the Euro took out a key 50%level at 1.2783 and now appears to have enough upside momentum to challenge theFibonacci retracement price at 1.2998. In the best case scenario, one can project that the current upsidemomentum and gloomy economic outlook for the U.S. economy is enough to drive theEuro up to at least 50% of the entire sovereign debt break at 1.3510.

The GBP USD also soared on Thursday, putting this market ina position to test a cluster of former tops at 1.5497 and 1.5523 on its way toa major 50% price level at 1.5635.

The fact that U.K.inflation is rising and U.S.inflation is falling was enough to drive investors into the British Pound atthe expense of the Dollar. This is because the rising inflation rate isbringing the Bank of England closer to hiking interest rates while the fallinginflation rate in the U.S.is keeping the pressure on the Fed to keep interest rates at historically lowlevels. Once again investors are going after the highest yields, promptingstrong the strong demand rally for the Sterling.

Following Wednesday’s weak assessment of the economy by theFed, the U.S.released data today pointing toward low inflation and weakness inmanufacturing. This news raised concerns about the near-term health of the U.S. economy, encouraging traders to think that U.S.fundamentals are making the Dollar a less attractive alternative to investors.Furthermore, now that the European Central Bank has taken steps to aid ailingnations, investors want to move on from the sovereign debt issues in Europe.

Stronger demand for the Euro is likely to continue until latenext week when investors are likely to begin paring positions ahead of therelease of the European bank stress tests. On Wednesday, rumors begancirculating that eleven European banks are expected to fail their stress tests.As we approach the release date, this type of rumor could encourage investorsto take profits after the recent rise and pare back positions until theuncertainty clears up. Until the report is released on July 23rd,look for trend traders to continue to drive the EUR USD higher as long as U.S. economicdata remains on the weak side.