28 June 2001, 17:34  US FX Daily Outlook: Euro falls sharply after data, Fed move

In early trade, EUR/USD dropped to a low of 0.8513 in the wake of the Fed's rate cut of Wednesday and some poor euro-zone economic data in the European morning session on Thursday. Dealers say a wide range of players have been in on the offer and are still looking to sell EUR, while a thin market has exaggerated the move. Few bids are seen on the downside to support the pair, with the next technical support not until the 0.8495-0.8510 region. EUR/JPY followed the pair lower to a 2-day low of 106.21 while EUR/GBP touched a 4-day low around 0.6039.
Euro-zone data released so far today have highlighted the contrast between the Fed's aggressive rate cuts of the year and the ECB's one 25 bps ease. With the market not expecting the ECB to act again for a month or two at the soonest in the face of euro zone inflation well above the bank's 2% year-on-year limit, the EUR appears to be in for a torrid time. Only the prospect of intervention as EUR/USD hovers close to its all time low, plus dealers' unwillingness to take aggressive positions in thin summer conditions, is likely to offer the EUR some support.
In an interview with Italy's Corriere della Sera, Hans-Werner Sinn, head of Germany's Ifo economics institute, said the ECB should cut interest rates by 50 basis points to boost German growth and help the euro zone avoid slipping into recession (story .12032). The half-point interest rate cut that Sinn is urging is double the size of the cut he asked for just over a week ago.
"I am worried about the strong slowdown of the economy and the ECB must act as soon as possible with a half point interest rate cut, so as to stabilize growth and set the conditions for a pickup," Sinn said, according to the newspaper. Sinn also said an ECB rate cut is helped by the U.S. Federal Reserve's decision Wednesday to cut key short-term rates in the world's biggest economy by 25 basis points to 3.75%.
"If the ECB does not act, the slowdown of the European economy would continue even further, bringing with it other countries, and there would be the danger of a recession." Sinn said an ECB rate cut might even boost, for a period, the euro, although he stressed that the single currency of 12 of the 15 European Union countries wasn't "as important as the economic situation in Europe."
Italian preliminary June CPI rose 0.3% month-on-month and 3.0% year-on-year, above that indicated by cities' data earlier in the month, while France's business confidence index slipped to a reading of +102 in May from +104 in April.
ECB member and BBK President Welteke sounded a cautious note on interest rates, citing currently high euro-zone inflation.
The outlook is very bearish for the euro unless intervention surfaces.

Support: 0.810 (overnight low), 0.8542 (20-day moving average), 0.8411 (June 11 low; 6-month low), 0.8372 (Nov. 23 low), 0.8245 (1.382% Fibonacci extension level the Jan. 6-May 4, 19 downtrend; target of fifth Elliott wave), 0.8228 (Oct. 26 low; lifetime low).
Resistance: 0.8616 (overnight high), 0.8673 (June 15 peak), 0.8790 (38.2% Fibonacci retracement level of the June-October downtrend), 0.8848 (61.8% Fibonacci retracement level of the Nov. 27-Jan. 5 uptrend).
JPY declined in the wake of poor Japanese May IP data, although sources said the BOJ's decision to keep monetary policy unchanged had little impact.
Japan's seasonally adjusted industrial and mining production fell 1.2% in May from April to 98.5 (1995=100), worse than the Ministry of Economy, Trade and Industry's projection of 0.3% gain, METI said. METI's survey shows output is expected to have risen 0.3% in June and will decrease 0.1% in July. METI repeated that "industrial output is on a declining trend." The BOJ will release the results of the June "tankan" survey on corporate sentiment at 0850 JT on Monday.
The outlook is bearish for the yen against the dollar but bullish versus the euro.

Support: 124.22 (overnight low), 122.50 (Gann 50-point pivot; targets: 122.00/123.00), 122.30 (60-day moving average), 121.05 (Gann 50-point pivot; targets: 120.55/121.55), 122.26 (20-day moving average), 119.65 (Gann 50-point pivot; targets: 119.15/120.15), 119.00 (38.2% Fibonacci retracement level of the August 1998-December 1999 downtrend), 118.30 (June 1 trough; 3-month low), 118.25 (Gann 50-point pivot; targets: 117.75/118.75).
Resistance: 124.84 (overnight high), 124.00 (Gann 50-point pivot; targets: 123.50/124.50), 125.50 (Gann 50-point pivot; targets: 125.00/126.00), 126.84 (April 2 high; 29-month high).

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