After going as high as 1.3404, EUR/USD could not sustain the psychological resistance of 1.3500 ranges. The currency pair remained in sideways mode below 1.3400 for over 15 hours but then fell strongly to 1.3263 before recovering slightly.
U.S. Debt crisis and President Barak Obama's Firm stand
President Barak Obama's firm stand about raising the borrowing limits to come out of the debt crisis has given some push to the strength of the U.S. dollar. Obama has firmly refused to accept the demands of the republicans to negotiate on federal spending cuts to raise the borrowing limits. "America cannot afford another debate with this Congress about whether or not they should pay the bills they've already racked up," was his message during a press conference in Washington yesterday.
Though the republicans are not backing away from their demands of linking the raise in the borrowing limits to the spending cuts and that keeps the pressure on the dollar but on the other hand Obama's refusal for any negotiations in this regards has been taking out some immediate pressure from the currency.
Recent economic releases
The latest economic releases from U.S. and Europe gave a neutral picture for comparative strength though it can be seen as mildly favoring the single currency i.e. euro in the short-term.
1) Consumer Price Index: The previous year on year change in the German CPI was 1.9%. The latest data of December which was released at GMT 07:00 on January 15th showed a rise to 2.1% which was as per the consensus of the economists.
The previous change in the year on year harmonized CPI was also 1.9%. The latest released data for December showed a change of 2.0% and though it was slightly less than the consensus of 2.1% but was better than the previous release.
2) German real GDP growth: There was a drop from previous 3.0% to 0.7% which was also less than the consensus of 0.8%.
3) European Monetary Union's Trade Balance: The trade balance reports showed an improvement. The previous release of trade balance s.a. (seasonally adjusted) for November was Euro 7.4 billion while yesterday's data for December showed an increase to 11.0 billion euro. Similarly the latest data for trade balance n.s.a. (not seasonally adjusted) came as 13.7 billion euro against the Novembers 10.2 billion and the consensus of 10.0 billion euro.
Latest data from the U.S.
1) Producer Price Index: Year on year change in the PPI released at GMT 13:30 on Monday showed a drop to 1.3% against the previous release of 1.5% and also the consensus of 1.4%. Same was the case with the producer price index ex-food & energy which showed a drop to 2.0% against the previous release of 2.2% and the consensus of 2.1%.
2) Retail Sales: The retail sales climbed unexpectedly in December. The month on month change was 0.5% against the previous 0.3%. The consensus of the economists was for a drop to 0.2%. Retail sales ex-autos also saw an unexpected jump from the previous -0.1% to 0.3%. The consensus was for a growth to 0.2%.
3) Business Inventories: There was no change in the business inventories from the previous 0.3%.
The market sentiments have been continuously changing but the current drop seems to do more with the psychological resistance of 1.3500 ranges and the sentiments and fear associated with that than any the economic data or development. We would expect EUR/USD to test of 1.3500 level if support holds good over 1.3230 and if another break over 1.3400 takes place. Please check the overall price action of EUR/USD.
Same as in the case with EUR/USD, the resistance which USD/JPY faced at 89.67 and the subsequent fall is more associated with the resistance of the psychological level of 90.00. The currency pair has been moving below this level since July 2010.and during this period it has even touched the post work war low of 75.35. After such a weakness the resistance of 90.00 becomes very strong. However the recent strong momentum indicates that sooner or later USD/JPY should try to test this level if support near 87.00 holds good. Please check the overall price action of USD/JPY.
The story is not different for EUR/JPY which went briefly to the high of 120.12 but could not sustain the psychological pressure of that range and fell strongly to as low as 116.86. Further recovery will be expected if any decisive break below 116.60 does not take place but an extended volatile move below 120.00 carry a high probability. Please check the overall price action of EUR/JPY.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.