The Week Ahead: Euro Likely to Weaken Further Against the Dollar

The past week had the potential to be explosive. Central bank meetings in the UK and Europe had traders licking their lips with anticipation for the possible outcomes of the meetings and the potential volatility they could bring. Sadly for volatility lovers, the week came and went with little significant turbulence. The FTSE ended the week up almost 150 points. The Dow Jones Industrial Average was not so lucky, losing more than 250 points; most of it on Friday afternoon, when the world largest insurance company AIG announced it will be seeking more then 12 billion dollars in new capital.

The new week brings with it a slew of data from UK and Europe, the common theme being inflation. From Consumer Price Index to Producers Price Index, traders will be looking for a number that's on the higher side of expectations, as oil prices are at an all time high and largely to blame for the inflation run. As it was mentioned last week in the EU bank speech that accompanied the rate decision, the main reason why the decision was taken not to lower interest rates, was the great concern that doing so would cause inflation to spiral out of control.

On the US side, the data will focus more on retail sales and the health of the manufacturing industry. Last week, Wal-Mart (WMT) and a few other big box retailers announced that their 'same store' sales were higher, possibly indicating that consumers are shopping more. If this is the case then perhaps this could be the stimulus that the US president was talking about, or maybe it could be explained by consumers hitting the shops to spend their tax refunds.

Last month the Euro/Dollar hit an all time high near 1.60, since then the Euro has been in a freefall situation, giving back more then 5 cents. Some research among retail foreign exchange merchants shows that the Speculative Sentiment Index is now showing more of a lean towards a weaker Euro. This is the 3rd week that the SSI has been indicating this.

With that in mind, the play of the week is as follows: We are looking for the Euro to weaken further against the US dollar, or at least not test the all time high levels hit earlier last month. A no touch on the Euro/USD maturing May 29th 2008, with a strike price of 1.60 could return 10% ROI.