The US has a day off work – though a lack of employment is in fact, the biggest problem facing the world’s dominant economy.
The EUR/USD 1.42 barrier was taken out early in the Asian session. This DNT structure had helped to keep EUR/USD in a range even as ECB rate cuts were being priced in. EUR/USD is now set to play some catch-up and head towards its next retracement level at 1.4109 – and if that breaks, beware a move to the July 12th 1.3837 low. This move would be in line with the two year swap spread signal. Services PMIs from France to Italy and Europe are only likely to confirm the sogginess of European growth, rather than help restore any confidence.
Positioning has turned against the euro again, and newsflow isn’t helping. The defeat of Angela Merkel’s party in regional elections over the weekend simply adds to the sense that saving the euro is going to be made more difficult by opposition from within Germany. Talks between Greece and Troika will resume in due course but until then, more articles about the euro’s demise are bound to appear. So far, the euro has been unbelievably resilient. This week it will be tested and if it does break down, correlations with wider risk aversion will resume. We will take our overall short-term trading strategy from the 1.4109 level – it needs to hold or the mood will darken everywhere.
The UK has seen negative coverage of the economy, and this morning, the PMI services figure will be watched with some trepidation. Even more than for the Eurozone, UK data are at risk of sliding backwards, and GBP/USD has a natural target in 1.60.
There will be little else to focus on today. Early indications of Labor Day spending in the US will help dictate the mood about the US economy, while in Europe we search in vain for political unity and wonder whether the ECB is going to radically alter direction to help stop the backward slide in the economy.
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Societe Generale
Research & Analytics