Euro Flirts With 1.60 - Will This Barrier Fall?

Talking Points
• Japanese Yen: falls as equities carry over the rally from North America
• Euro: Trade Balance better than forecast
• Pound: Mortgage intervention may be in place
• US Dollar: Philly Fed and LEI on tap

Since yesterday euro bulls have tried to make a run at the 1.60 four separate times but have been repelled each time with the defense of option barriers at that level remaining in tact. Still it may just be a matter of time before this seminal level falls taking out the many stops likely placed there.

The economic backdrop from the EZ continues to be supportive with tonight’s Trade Balance data showing a surprising surplus of 2.1 Billion euros versus expectations of -2.1 billion deficit. The fact that the region’s producers are able to export demonstrates that despite record high exchange rates the EZ economy has not yet been materially impacted to downside. Tonight’s news should allow the ECB to maintain its hawkish posture for the time being and may provide just enough momentum to finally tip the price over that key level.

The pound also saw a boost today, after a Reuters report suggested that UK authorities mortgage intervention plan could be announced as early as next week alleviating some of the risk concerns that plagued the unit recently. Cable rose to within a few points of the 1.9800 level in mid-morning London trade as the result of the news. Sterling continues to suffer from perception that UK rates are inevitably headed lower, however, given yesterday’s relatively string employment data, the pace of rate cuts may be less aggressive than some pound shorts assumed, providing some near term support for the currency.

Finally, today’s North American trade will focus on US LEI and Philly Fed numbers both of which are expected to improve. The greenback was aided by better than expected Industrial Production data yesterday which indicated that the lower dollar may finally be helping US manufacturers and if Philly Fed confirms this pattern, euro shorts may be able to hold off the rush to 1.60 for a while longer. The one fly in the ointment to this scenario would be worse than expected weekly jobless claims, which would once again raise the possibly of a larger than expected 50bp cut from the Fed.