Euro Rebound Aborted as US Economic Data Print Surprisingly Strong

On Tuesday, EUR/USD trading was very volatile, but in the end iron-strong US data prevailed, breaking the bone of the ST euro rebound. In early morning, EUR/USD extended the impressive rebound that started on Monday, albeit at a slower pace. Once again, there was hardly any hard news to explain the move.

There was a brief correction in the run-up to the release of the Euro-zone industrial production data and the ZEW economic sentiment. The first one was slightly weaker than expected, but the ZEW showed a gain for the second consecutive month. The combined picture of these data was mixed. There was a brief hesitation in the EUR/USD dynamics, but EUR/USD soon turned north again and tested offers in 1.3500 area around noon.

Looking at the price action in other cross rates, the move was principally due to broad based dollar weakness, rather than euro strength. Nevertheless, S&P revised the outlook of the Belgium AA+ rating from stable to negative, which triggered a small setback in the EUR/USD cross rate, that might however also have been due to vertigo when the 1.35 level was reached. At first, the damage was limited, but the dollar gained some more ground across the board ahead of the US economic data. The US PPI, small business confidence and retail sales, all came out considerably higher/better than expected. There was a very brief, minimal reaction down in EUR/USD and a similar small reaction lower in US Treasuries. Only half an hour after the release, the dollar was bought and the pair dropped sharply to the intra-day low at about 1.3360, where the down-move fizzled out.

Traders bid the pair up to about 1.3420 ahead of the FOMC. The FOMC statement was very much as expected. The FOMC confirmed that rates will stay at current extremely low levels for an extended period of time, while the FOMC also confirmed its QE-2 program.

The text of the statement contained only minimal changes and only concerning the economic situation. Regarding the latter, the recovery was described as continuing, which was a bit better than the assessment in November, but only in line with the published economic data. EUR/USD barely moved on the publication, but later on the dollar gained some ground, in a move that mirrored an increase in US yields. At the end, EUR/USD closed at 1.3378, only slightly off the previous close of 1.3391, but sharply below intra-day highs at about 1.35.

Overnight, EUR/USD slightly lost more ground in Asia, but the movement gathered pace when S&P announced it had put the Spanish AA1 rating on review for possible downgrade. Currently the pair trades slightly below the 1.33 level.

EUR/USD Wednesday, December 15

Today, the calendar in Europe only contains some second tier data, but the speeches of EU’s Van Rompuy and Barroso to the EU Parliament may get media coverage, as the key European Summit starts tomorrow.

In the US, the calendar contains the CPI, the Empire State manufacturing survey, the TIC data and the industrial production data. The CPI and the Empire Manufacturing survey might be interesting for currency trading. Markets will keep an eye on core inflation as this indicator hit a multi-year low last month. Another negative surprise might keep speculation alive the Fed may still up its bond purchase program, even if recent strong activity data have make such an extension less likely.

The Empire State manufacturing index showed quite some wide swings this year. The market is anticipating a rebound after the sharp setback in November. We expect the indicator to be only of intra-day relevance for EUR/USD trading though. A positive surprise might support the dollar. Last, but not least, the EU summit on Thursday and Friday is coming closer. One might expect again tactical positioning from EU policy makers and probably also renewed market chatter on hot issues like the issuance of an ‘E-bond’ or an increase of the amount of the EFSF. Over the previous weeks, this debate most often weighed on the single currency.

Content provided by: KBC Bank