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EUR/USD - 1.5710 Daily Market Outlook - Jul 4 EUR/USD Technical Analysis 4 July 2008 ECB will stop to rise the interest rates said Trichet More EUR/USD USD/JPY Technical Analysis 4 July 2008 Market Moving News: USD/JPY - Jul 4 USD/JPY - Dollar Yen, European Session - 04/07/08 More USD/JPY

- The USD rebounds, or was it the EUR finally stalling?

- So what has really changed? Lots and not so much

- Key data and events next week: FOMC, ISM & NFP

The USD rebounds, or was it the EUR finally stalling?

Many in the media and the market are pointing to the USDs gains this week as a turnaround for the beleaguered greenback. But I think a better way to view this past weeks developments is in the context of sudden shifts in ECB rate expectations. Recall that over the last several weeks markets had been pricing out the prospect of anticipated ECB easing, both in light of repeated ECB warnings and resilient Eurozone data, which led to a steady rise in the EUR. Then, early this past week, some ECB officials went so far as to suggest that the ECB might even need to raise rates to fully combat inflation, and that led to a surge higher in EUR, which saw EUR/USD crest 1.6000 very briefly. I can almost imagine the phone line lighting up between the ECB in Frankfurt and the Banque De France (BdF) in Paris with an enraged Trichet calling Noyer to take back his comments that a rate hike might happen. The reaction was swiftNoyer the very same day held an interview with the WSJ in which he retracted his comments, saying they had been "over-interpreted" by the market. The very next day, ECB Pres. Trichet came out and unequivocally declared that the current ECB rate was sufficient to ensure price stability, pointedly noting that was the view of the governing council.

The market reaction over this period saw reluctant asset managers, many who had stepped to the sidelines after the repeated failure of EUR/USD to take out the 1.6000 level, react to the hawkish comments from Noyer and others on Tuesday , and pile into long EUR/USD positions as it broke above 1.5950, finally pushing it over the 1.6000 level. The rug was pulled out from under them after Noyer back-tracked and after a final try at 1.6000, EUR longs took it between the eyes on Thursday with a weaker German IFO corporate sentiment survey and Trichets steady rate comments. The great bailout from 1.6000 was on. The move lower was complemented by jawboning from EU finance chief Juncker and some not as bad as expected data out of the US (weekly jobless claims and durable goods orders). Looked at from this perspective, the moves seem to make better sense. It also helps explain why the EUR (and CHF) has seen a significant adjustment lower against other key currencies (e.g. GBP and JPY), while the USD remains relatively range-bound against those same currencies.

So what has really changed? Lots and not so much.

Cracks appear in the Eurozones economic faadeThe April German IFO disappointment (business climate 102.4 vs. exp. 104.3 and prior 104.8) was preceded by an unexpected plunge in Belgian business confidence from +1.20 to minus -7.9, its lowest level since late 2005. Since when does anyone care about Belgian data? Belgium (and the Benelux in general) is heavily reliant on trade and the steep drop is seen as an indication that EUR strength had become unbearable and was undermining economic prospects. The German IFO decline reinforced that impression. Still, I would note that April Eurozone PMIs offered more mixed readings and continue to point to slower, but ongoing growth (Eurozone April services PMI rose from 51.6 to 51.8; manufacturing PMI dipped from 52.0 to 50.8; April composite PMI rose from 51.8 to 51.9readings above 50 indicate expansion.) So the case for a pronounced Eurozone downturn remains to be seen.

EU officials appear more determined than thought to cap the strength of the EuroJean Claude Juncker, the head of the group of EU finance ministers, spoke out virtually in real-time on several occasions to object to EUR gains since the G7 met two weeks ago. ECB pres. Trichet similarly voiced strong concern that further EUR strength jeopardized the economic outlook. While the US still does not appear to be on board concerning market intervention, it appears increasingly likely that unilateral European intervention may yet come into play if EUR strength returns. The effect of this is to introduce two-way risk in the minds of speculators, creating a self-limiting dynamic, with 1.6000 now the clear line in the sand.

US rate expectations have shifted to embrace either steady rates from here or one more % cut to 2.00%, followed by a pause. Since last Friday, US rate expectations have seen US 2-year yields rise over 40 bps and 10-year yields gain nearly 20 bps. The fundamental outlook has not really changed and I still expect a deeper and more protracted US downturn. (That changes when the following stop/reverse: declining US home prices; rising energy (oil) prices; rising unemployment; tight consumer/corporate credit conditions.) As such, the Fed is likely to need to cut rates later at some stage, and the data will continue to drive that outlook. For the time being, however, interest rate differentials are set to cease being a USD negative, but remain far from becoming a positive.

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