Euro Set-Up for Rally to 1.3510 Over Short-Run

The Euro made a new high for the week on Friday, driven bydisappointing data. The rally through the former top at 1.3262 resumed the uptrend whileforming a new swing bottom at 1.3119 in the process.

The Euro made a new high for the week on Friday, driven bydisappointing data. The rally through the former top at 1.3262 resumed the uptrend whileforming a new swing bottom at 1.3119 in the process.

This morning the U.S. government releaseddisappointing jobs data which solidified the thought that the economic recoverywas stalling. The report which said private employers added fewer jobs duringJuly than forecast, raised concerns amongst investors about the sustainabilityof the U.S.recovery.

The disappointing non-farm payrolls data will most likely beused by Fed officials next week when they set monetary policy. The weaker jobsnumber will most likely mean the Fed will announce stimulus measures to helprevive the economy which may include renewing its quantitative easing program.

Improvements in the Euro Zone economy at a time when the U.S. economy isstill struggling makes the Euro a more attractive investment. Upside momentumindicates the Euro has enough buying power behind it to reach the 50% level at1.3510 over the near-term.

Earlier this week the European Central Bank monetary policycommittee voted to leave its benchmark interest rate unchanged the historicallylow 1% level. This move was unanimously expected by traders.

Following the release of the interest rate decision, ECBPresident Trichet noted that the European bank stress tests completed since thelast meeting have helped increase transparency and fueled a move toward restoringmarket confidence in the banking sector.

In the wake of recent strong Euro Zone economic data,analysts had expected Trichet to outline an exit strategy or discuss the ECB’splan for its special liquidity provisions. In other words, is the ECB going tocontinue to provide free-flowing liquidity to the market or begin to withdrawit. Trichet indicated the ECB would consider this action on that next month.

Trichet failed to say anything really bullish about theEuro, but actually may have helped limit gains by stating that the second halfof 2010 was likely to be “much less buoyant” than the second quarter because ofthe implementation of new financial austerity measures. He also added that itwas too early to “declare victory” in the economic crisis.

Based on Trichet’s comments, the Euro is most likely tocontinue to be driven by economic news regarding the U.S. economy. At this time, the ECBseems a little more upbeat about the Euro Zone economy while the U.S. Fed isbeing encouraged to consider the renewal of its quantitative easing program toward off a potential double-dip recession. As long as the U.S. economy remains weak andinterest rates low, look for the Euro to remain firm.

The situation is not all rosy for the Euro however. Many ofthe recent improvements in the Euro Zone economy have taken place beforefinancial austerity measures were in full effect. Furthermore the ECB is stillproviding stimulus. Like the U.S.,consumer spending will be the key to sustaining the recovery. If consumers decideto pull in their purse strings at a time when the government is cuttingspending, then the economies in the Euro Zone may come to a screeching halt.

Aside from the disappointing data report, the biggest surprise was the loss of jobs in Canada.Throughout the entire global recession, the talk of the town has been Canada and howthe country avoided a prolonged recession and banking crisis.

The USD CAD is traded sharply higher due to an unexpecteddecline in the Canadian jobs market. The news out of Canada reflects its first joblosses of the year.

Friday’s Canadian jobs report showed that the economy lost9,300 jobs in July while the unemployment rate unexpectedly rose to 8 percentfrom 7.9 percent. Analysts had predicted an increase of 15,000 jobs after astrong gain of 93,200 in June.

The Canadian Dollar fell on the bad jobs data as tradersspeculated the weakening U.S.economy would have an adverse affect on the Canadian economy going forward.

Based on the drop in yields and the rise in Canadian bondprices, investors are beginning to price in the possibility that the country’srecovery from the recession is starting to cool and could encourage the Bank ofCanada to refrain from additional interest rate hikes over the near-term.

Traders should continue to focus on the weak U.S. economy asthe main catalyst behind the movement in the currency markets. With interestrates expected to continue to remain low for a prolonged period of time and theFed expected to remain dovish on the economy, continue to look for a weakerU.S. Dollar.