Independent Analyst: Lena Manousarides, 13th November 2008

publication date: Nov 13, 2008

Euro and Pound Struggle to Gain Which Could Mean More Weakness Ahead!

Its official! The German economy has entered recession. The latest GDP numbers out of Germany showed that the economy contracted for the second consecutive month and therefore the country now faces the wrath of the global financial crisis. Euro was down all across the board after the news and especially against the pound which printed a new life time high at 0.8455.

EUR/USD was trading around 1.2460 at the time of GDP data and the pair made a break of 1.24 briefly to find support at 1.2380. From then on euro corrected towards 1.2550 after the move was whipsawed in a matter of minutes. The pair is trading still heavily and the question is not if there will be further downside, but when! Next level to watch is 1.2330-50 and if that level gives way then 1.22 might be the next target. Let’s not forget that 1.2330 is at the moment the lowest level seen for many years and traders might try to keep the double bottom intact. However with the dollars recent rally and the prospect of further gains due to risk aversion, EUR/USD could easily fall to 2005 lows at 1.18-1.20.

Today’s calendar is quite empty apart from the GDP numbers from Germany we had in the morning and the trade balance numbers we had from the US, which didn’t really catch traders attention and it was a non event altogether. The numbers showed that trade deficit narrowed further last month at -56.5B and that is not a surprise as a stronger dollar means a smaller deficit. Dollar looks unchanged after the data and it will be interesting to see New York open and how the currencies will behave in relation to DOW JONES. Oil is trading on the downside too, and today it was trading below $55 per barrel which also fuels further dollar strength.

Markets continue their free fall with NIKEI dropping more than 400 points overnight and European markets still trading negatively too. It looks like DOW JONES will continue in the same manner and the latest proofs that Germany, the UK and the US are facing recession gives traders further worry that more countries will follow. The fact that US Congress is talking about the bailout plan once again and is thinking of ways to add or alter a few parameters means that the government is quite nervous about the crisis and does not really believe that the rescue plan will be enough to fix the long term problems in the US economy.

Nevertheless, when traders smell the fear in Government or FED statements, they panic and continue to liquidate their assets which causes further collapse in the markets.

Yen and Dollar continue to be the flavour of the month in November and this might continue to be so, until at least the end of the year. It will be very interesting to see how markets will react to the year end and where January will find EUR/USD and GBP/USD. Let’s not forget that at the same time last year the euro was climbing new tops every day and was on its way to 1.70 according to many economists and specialists. Well, forget all that and all the Euros past glory as it will be a miracle for now if we see even 1.40 anytime soon. Until we see signs of stabilisation in European economies and signals that ECB is done with easing rates, then euro might spend the last months of the year trapped between 1.20-1.30…