No news is good news for the Euro

A perception that the EURUSD has bottomed is floating around. The logic for this theory is that the EU zone economy is showing less strains than the US economy. Add to that the words from Trichet who drew a line on the sand indicating a virtual end to the ECB rate cuts. Meanwhile, Chancellor Merkel damped hopes that Germany would announce a stimulus package this weekend. Across the Atlantic, the US almost lost its auto industry last week after the US Senate voted down a bailout - USDJPY fell to a 13 year low of 88.0. The US Fed/Treasury will rescue US carmakers but the White House said that details would only come out Tuesday or later. The unexpected drop in US exports hurt Nov’s trade balance and pointed to weak global demand for US goods and services. US retail sales and prelim Michigan consumer confidence did come in above consensus. The big 3 North Asia nations announced sweeping fiscal stimulus packages this week.

This coming week is packed with important economic announcements. The US Fed will likely drop rates to 0.5% and claim it is done cutting. The most important news could come on Wednesday from the NOV EU CPI release (2.1% y-o-y cons, 3.2% prev). If EU CPI comes below expectations, Trichet’s bravado of keeping EU overnight rates around 2.5% will not make much sense.                           


Scenario Analysis
Last week we indicated that EURUSD would most likely trade in a 1.2400-1.3100 range (1.2690-1.3400 actual). The euro has temporarily broken out of range trading and is aiming to go higher. The most likely trading range for EURUSD this week is 1.3050-1.3600.  

The EURUSD rally has gained much in a week (up 5.2%) and it is faced with a major resistance going back to Jul 08. The euro is ripe for a pullback around 1.31 but the lack of major EU economic news may give enough momentum to challenge this key resistance. The Tue EU PMI numbers or Wed EU CPI release could possibly hurt the euro. It seems that more bad US news is not having much of a negative impact on the euro anymore. So, until the bad economic news out of Europe come – and they will – look for an emboldened euro to remain on the attack. A break of a key EURUSD support at approx 1.3150 on Wednesday might signal that we are going back to a range bound pattern.