It all started during lunchtime in Tokyo. The EUR/USD was following its usual sleepy holiday path when a lift of stops by a US brokerage house at 1.3410 tipped the pair quickly to the 1.3440 level in a matter of minutes. The price has held that level for most of the European session with yesterday's positive US GDP numbers of little help to euro bears. In general, this week the market has shown no mercy to euro bears ignoring any dollar positive economic data.
One possible reason for dollar skittishness were comments by former IMF Chief Economist Kenneth Rogoff that EUR/USD could hit 1.50 if the US fails to act soon. Mr. Rogoff noted that currency interventions were a "complete waste of time" due to the enormity of the size of the EURUSD market.
The market clearly wants to see a more responsible fiscal policy from the Bush Administration. Mr. Bush's recent comments that he looks forward to "working with Congress on the tough budget," initially resonated positively with the market. However, given the geo-political constraints on US, most market participants want to see results not rhetoric. When Mr. Bush submits his proposal for the $2.5 Trillion US budget to Congress early next year, the FX market will be watching carefully.
Meanwhile, as we wrote yesterday, "euro's refusal to correct by more than a few pennies after its recent massive rise indicates strong underlying demand for the currency. A push through the 1.3500 handle is not out of the realm of possibility in holiday thinned trading which would then see dealers gladly run the stops bunched up at that level."
Today's US economic data may stymie the run to 1.3500 if the numbers print positive. However, if the Personal Spending numbers and Durable Goods report miss materially, the 1.3500 handle could be within grasp.