EUR USD (1.2605) Yesterday saw Finland and the Netherlands voicing reluctance to idea of allowing the ESM to buy the debt of peripheral states in the secondary market. Reports (subsequently denied) also circulated that Slovenia may become the sixth eurozone country to ask for a bailout, and data releases confirmed record unemployment in the zone. All these factors prepared the ground for the euro bears to sell early in the session. The worse-than-expected US ISM reading, although dragging the euro even lower, did not do too much damage as the selling had been done earlier in the day. Given depressed data, both from the eurozone and the US, expectations are now high for the Fed to ease. Although ISM sunk to its lowest level in three years, its employment content has not revealed any sharp decline. Thus this data alone is probably not enough to change the Fed’s mind about the effectiveness of easing, or assuage its fears that the negative impact might outweigh the benefits. Arguably, the economic conditions to justify QE were already in place at the last meeting and the Fed did not move. Since then, not much has changed. The euro’s dip turned just ahead of our first 1.2560 support yesterday. However, only below 1.2510 would it risk losing its current momentum. We still expect it to climb to 1.2745, the upper border of the recent consolidation zone and, beyond that, even to 1.2840, the key level for further strength.
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Deutsche Bank