"Dealers express a good deal of unease over the outsized influence of the Asian central banks in EUR/USD at present and hearken back to the range-bound markets of the March/October 2004 timeframe as a foreshadowing of things to come," notes IFR Markets in their analysis of today's market. We couldn't agree more. Despite the terrible Trade Deficit numbers euro bulls could not rally the unit above the 1.3300 figure yesterday and today's lackluster data out of both EZ and UK is offering little reason for traders to get long the anti-dollar currencies.
In the Euro-zone, German GDP registered as expected growth of 1.7% with Germany's Economy and Labor Minister Wolfgang Clement claiming that the signs of a stronger German economic recovery in 2005 are "growing". However he refused to attach hard numbers to his opinion and the market did not take the comments seriously. Adding pressure on the euro was the release of the German budget deficit which at -3.9% of GDP stands far wider than the -3% target that Germany is obligated to honor under the EU Constitution. In UK both Manufacturing and Industrial production reported lower than expected at -0.1% and 0.2% respectively putting in to question the strength of the UK bounce after the late summer/early fall "soft patch" period.
Although, US Balance Sheet position is undoubtedly deteriorating, US GDP growth is far stronger than that of Japanese or European economies. Therefore, the FX market is now at a standstill evaluating which factor will be more important to speculative flows. Today's US Advanced Retail Sales which are expected to print a healthy 1.0% gain on the back of strong auto demand, may help the dollar regain some of yesterday losses. However, overall we believe the pair will trade in a wide 1.30-1.35 band for the time being as the market awaits more conclusive economic data to determine which unit is stronger.