Will the EUR/USD Hit 1.60 This Week?

The Euro has staged a dramatic recovery against the US dollar this past week and now it is trading approximately 100 pips away from its record highs. If economic data was the only thing that mattered, the EUR/USD stands a very good chance of breaking 1.60. German retail sales, unemployment and Eurozone PPI are the only major releases on the EZ economic calendar, which means that Bernanke’s comments and non-farm payrolls will probably drive the price action of the EUR/USD. I continue to believe that there will be further job losses in the U.S. economy as Wall Street and Main Street announce more layoffs. Also, the credit markets and liquidity are still a problem, so I don’t expect optimistic comments from Bernanke.

Consumer confidence as measured by the University of Michigan fell to a 16-year low. Even though personal income ticked higher, spending was the weakest in 17 months. Regardless of whether the Federal Reserve admits it, 85 percent of the people surveyed by the University of Michigan already feel that the U.S. economy is in a recession. They have cut back spending and are focusing on repaying debts and rebuilding their savings. Such a dramatic shift in sentiment will be difficult for the Federal Reserve to fix, especially since banks and mortgage lenders have been counteracting the Federal Reserve’s efforts by tightening lending standards.

Commodity prices are also skyrocketing with rice prices Thursday jumping 30 percent in one day. Inflation will come back to haunt the Federal Reserve, but with consumers retrenching and the housing market weakening, the outlook for growth is so bleak that the Fed may have no choice but to focus on fixing the more immediate problems.

Although I think that the Federal Reserve will need to bring interest rates down to 1.50 percent, cutting interest rates alone will not do the trick.

There is one potential European risk that could turn the EUR/USD around, and that is a major write-down by a German bank. Last week, Guenther Beckstein, the prime minister of Bavaria said that the state-owned Bayern Landesbank will be announcing write-downs of EUR 4 billion, more than double their initial EUR 1.9 billion forecast. Although this number is small, it comes on the heels of a potentially huge loss for German banks. According to Spiegel, which is a leading German newspaper, local banks could “hemorrhage 70 billion Euros.” They are even speculating that Germany’s third largest bank, WestLB could require a 2 billion liquidity injection.

Whether this happens remains to be seen, but whoever delivers the biggest surprises – the U.S. or the Eurozone - will determine the fate of the Euro.

Comments

[roger maxims]

The real questions for EUR/USD, Kathy, is this:

Q. Is Europe in deeper trouble than US amid the credit crunch?

A. Well US banks will write down about 5 - 10 times what Eurobanks will, but let's say we are just as bad because of globalisation.

Q. If we are equally handicapped, whose currency will be more expensive?

A. Um....let me see.... USA - approaching 0%; Europe - keeping 3%+ with equal inflation at both places.

Q. Hey but Eurozone unemployment is so damn high?

A. Well... the French will strike anyways... the Germans will be just as inflexible... the Italians laid back... and more countries like Romania waiting to share wine mountains. Fact is, status quo remained since 1999 when ECU became EUR.

Q. So will we see 1.60 this week?

A. What's the point of this? Same as asking if we will breach 95 yen or 0.95 CHF.

Kathy, we are in a downward spiral. Governments have no interest in intervening currencies because this time it is jobs that are disappearing.

[phdinsuntanning]

yen is the key on EUR/US, and just take a look: "someone" is keeping it at 100 , nice intervention, I hope it works...

[roger maxims]

BoJ just confirmed it has not intervened for 4 years since 1 April 2004.

And if you're skeptical, they are actually quite honest about these things, since it helps achieve their purpose of manevouring free markets.