2 February 2005, 16:36  Euro the Indomitable

Despite registering the worst unemployment rate in Germany since World War II, despite suffering sharply lower German Retail Sales than expected, despite breaking the psychologically important barrier of 5 Million Germans without a job, the euro, like the Terminator, continued its relentless rise against the greenback, shrugging off the latest gloomy economic news. During most of the early European session, the euro held near the highs set in Tokyo as most FX dealers ignored the poor German data. Granted, the news was well known ahead of time and market was psychologically prepared for the numbers. Yet the dollar bulls must be truly befuddled at euro's strength especially on a day when the Fed is expected to raise rates another 25 basis points, providing the dollar with a 50 basis point positive carry spread against the euro - a spread that may widen if the ECB decides to lower rates this year in order to stimulate domestic demand.
The market will of course focus on the Fed statement parsing every comma in search of clues to future actions. At present, the consensus view is that the measured language will remain which may explain the market's lackluster interest in dollar longs. However, if this Fridays' Non-Farm payrolls beat expectations of 200K new jobs, they will stand in stark contrast to the bleak data out of Europe. At that point euro bulls will have little immediate fundamental support for their position and the unit may finally weaken.

FX Spot Overnight

EUR holds 3070 after rally in Asia despite poor DEM unemployment
JPY trades back to 103.50 on buying in the crosses
GBP static as Construction slows but still expands
CHF dripping downward as euro stays strong

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