Euro Vs Dollar

Euro Vs Dollar

The race to be the biggest problem child currency has once again been set in motion as last Friday’s weak Non-farm payroll, which exposed a measly 18k increase in June payrolls and an increase in the unemployment rate, actually left the Greenback relatively unperturbed. Where as closer to home, Europe’s problems outweighed the negative impact of more signs of a weak US economy, leaving the EUR as a bigger loser. The Dollar’s toughness was even more remarkable bearing in mind the drop in US bond yields in the wake of the data. Nevertheless, the news over the weekend that talks over the US budget deficit and debt ceiling broke down will leave USD bulls with an unpleasant taste in their mouth.

Should weak jobs recovery hurt enthusiasm for the Dollar? To the extent that it may raise expectations of the need for additional Fed asset purchases, it may prove to be a barrier for the Dollar. However, there is adequate reason to look for a bounce back in growth in 2011 and in any case the Fed has set the hurdle at a high level for more quantitative easing (QE).

Fed Chairman Bernanke’s response and outlook will be under scrutiny at his semi-annual testimony before the House (Wed) although he will likely stick to the script in terms of US recovery hopes for next year. This should leave the USD with no great concerns. There will be plenty of other data releases this week to chew on including trade data, retail sales, CPI and PPI inflation and consumer confidence as well as the kick off to the Q2 earnings season.

Fresh worries in Europe, this time with contagion spreading to Italy left the EUR in bad shape and powerless to take advantage of on the soft US jobs report. In Italy high debt levels, weak growth, political friction and banking concerns are acting in unity. The fact that there is unlikely to be a final agreement on second Greek bailout package at today’s Euro group meeting will act as a further weight on the EUR.

Talks over debt roll over plans, the role of the private sector and the stance of ratings agencies will likely drag on, suggesting that the EUR will not find any support over coming days and will more likely lose more ground as the week progresses. If these issues were not sufficiently worrisome, the release of EU wide bank stress tests on Friday will fuel more nervousness. Against this background EUR/USD looks vulnerable to a drop to technical support around 1.4102.

Report by Philip Ryan