The main concept within the foreign exchange market remains the pressure on the US dollar. There are several forces at work and seem to reflect both short covering and new long position. The net speculative position in CME futures remains short euros and sterling. The euro’s net short position has been cut dramatically from a record 114k contracts in mid-May to 21.3k as off early last week. Sterling shorts have been reduced from 76.7k in early May to 18k early last week. The net speculative sterling position has not been long since Aug 2008. The dollar’s slide has been of sufficient duration and magnitude to encourage momentum traders and model-driven funds to get short. Fundamentally, there are a number of reasons for the position adjustment.
First, and probably most importantly, the European experiment of monetary union without political union is not collapsing as many had thought a couple of months ago. There are a number of analyst and traders that are still expecting such an outcome, but they have greatly diminished as European officials innovated and created greater institutional capacity. Second, the US economic recovery appears to have slackened. Yesterday’s manufacturing and construction number might show a different picture as August unfolds, but the recent economic data, for May and June have been relatively disappointing. However, given the structural headwinds and the recent experience, many fear the worst. Third, European economic data has surprised to the upside and this stands in stark contrast with the US data stream. Most European data has been better than expected, and a continuation, will lead to a strong interest rate differential, and better money flow into Europe.
The Euro and the pound have pushed through the 100-day moving average resistance area, and the 20-day moving average is now crossing the 100-day moving average, showing that short-term momentum continues to move toward the Euro. The trade is to stay long the Euro until resistance near 1.3700.
