Euro Highest

EURUSD resumed its uptrend in early European trade today as it once again challenged all time highs set last Friday at 1.4528. Boosted by a rebound in European equity markets and better than expected economic results from the Euro-zone, the pair continues to hold the 1.4500 figure as market participants await the ECB meeting this Thursday.

As we noted in our weekly, “The ECB meeting on Thursday remains the key to further gains in the euro. Although no one expects the central bank to hike rates in November, the European monetary authorities generally like to prepare the market for any policy moves. To that end Mr. Trichet’s commentary will be crucial in signaling whether the bank will tighten in December. ECB officials have been uniformly hawkish in their recent statements but it remains to be seen if they will be willing to raise rates in the face of record high exchange rates for the EURUSD.”

On the economic front EZ news was generally positive today with PMI Services printing slightly better at 54.7 versus 54.5 expected. Looking at the details of the subcomponent surveys the German data revealed that while new business improved markedly jumping from 52.1 to 54.5, business expectations slipped below the 50 boom/bust line to 48.7 suggesting that the higher euro is starting to weigh even on the region’s services sector.

With US economic calendar empty, the pair will most likely trade on risk assumption/risk aversion flows, driven by the price action of US equities. The trend in the EURUSD remains up, and the pair may well challenge the 1.4550 level, as euro longs try to knock out option barriers set at that price. However, we continue to believe that any forward progress in the pair is likely to be incremental from this point onward, unless US data shows significant deterioration, inviting further cuts from the Fed or ECB determines that inflation risks outweigh the dangers of sabotaging growth and chooses to hike rates to 4.25% by year end.