Daily Strategy Jan 28 2010 - Euro support remains under attack

By IBTimes Staff Reporter | January 28 2010 7:09 AM

The latest Federal Reserve statement was slightly stronger than previously, but there will still be little expectations of a near-term increase in interest rates which will limit dollar buying support on yield grounds. The Euro is likely to remain vulnerable to selling pressure as confidence in the Euro-zone region remains weak and the dollar will gain some support on defensive grounds. In the very short term, there should be further EUR/USD support below 1.3950 area, but rallies are liable to stall quickly with further losses to the 1.3850 region realistic within the next few days. Look to sell near 1.4050.

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The Euro was unable to push back above the 1.41 level against the US dollar on Wednesday and remained generally on the defensive during the day. Underlying confidence in the Euro-zone economy remained weak with further unease over the debt situation within Greece and further speculation that pressures could spread to other countries with some rumours of a forthcoming debt-rating downgrade for Portugal.

The US housing data was again weaker than expected with new home sales declining to an annual rate of 342,000 for December following a revised figure of 370,000 the previous month. There was evidence that sales demand triggered by tax credits was fading which tended to undermine overall sales and will reinforce doubts over the economy.

As expected, the Federal Reserve left interest rates in the 0.00 - 0.25% range following the latest meeting. The Fed adopted a slightly more optimistic tone towards the economy, but was still very cautious over underlying trends. The Fed also maintained the commitment to maintaining low interest rates for an extended period while there was a promise to gradually withdraw quantitative measures.

The vote was not unanimous as Regional Fed Governor Hoenig dissented with a preference for the extended period references to be removed. The majority will hold sway in the short term, but there will be some speculation over further calls for a less aggressive policy which could provide some limited dollar support.

The US currency strengthened to test Euro support levels below 1.40 following the Fed decision and there was sharp selling pressure in Asia with stop-loss selling pushing the Euro to lows below 1.3950 before a rally back to 1.40.