Market Opinion Foreign Exchange

Foreign Exchange
1.2000 Proving Difficult

However, it would only be short-term in nature, we believe. If EUR/USD breaks above the key 1.2080 area, we see further gains to 1.2150, with major resistance coming in at 1.2300 on any prolonged correction.
Indeed, there was sufficient positive data from the US to send the dollar higher. Aside, from hawkish comments from various Fed members, durable goods orders rose by 3.3% m-o-m, well ahead of consensus expectations for a 0.7% increase. In addition, the National Association of Purchasing Managers for Chicago reported that its index jumped to 60.5 in September from 49.2 in August.

However, the University of Chicago consumer sentiment index fell to 76.9 from 89.1 in August. This piece of data may well have foreign exchange players cautious surrounding the negative effects of Hurricane Katrina on domestic demand, even if they are only anticipated to be transitory. Indeed, the upcoming non-farm payroll release on October 7 will give a clearer indication of just how resilient the US economy actually is.

That said, although euroland is experiencing a gradual improvement in economic activity, we still believe that growth dynamics in the US are significantly superior as to warrant a stronger currency. As a result, we still favour a break below 1.2000 for EUR/USD, either this week, or over the coming weeks once one or both of the above resistance levels have been tested. The move through 1.2000 sets up 1.1900. Any close below 1.1900 opens up a whole new trading range for EUR/USD, that will take the exchange rate much lower over the medium term.