Euro Rally at Risk Ahead of German GDP Data:8/8/2010

The Euro hit fresh multi-month highs against the US Dollar amidst generally positive economic developments out of the single currency bloc and fairly disappointing economic data out of the US economy. Traders sent the USD lower against every single G10 counterpart through Friday’s close, and momentum plainly favors further declines. Given comparatively strong fundamental developments out of the Euro Zone, it is relatively little surprise to see that the Euro was quite nearly the top-performer through Friday’s close. Yet the coming week of European economic data could very well set the tone for short to medium-term trading.

Markets anxiously await the results of several key Euro Zone economic data releases in the week ahead—most notably German and broader Euro Zone Gross Domestic Product growth figures for the second quarter. Bullish trends in business survey figures and other key data points lead economists to predict that Germany saw its strongest growth since Q1, 2008 in the second quarter. Such relatively lofty expectations leave ample room for disappointment, however, and it will be critical to see whether reality can match forecasts. Analysts likewise believe that Germany—Europe’s largest economy—will continue to drive broader Euro Zone growth. It suffices to say that any disappointments out of said release could have broader implications for general market sentiment for regional fundamentals.

Traders have recently seemed all-too-willing to punish the US Dollar for lackluster economic data as of late, and one has to wonder whether similar disappointments out of the Euro Zone would have the same effect on the Euro currency. Certainly the past two months of gains leaves short-term momentum plainly in favor of EURUSD gains. Yet the currency pair is approaching what may potentially prove a significant resistance mark at $1.3500—the 50% Fibonacci retracement of the December, 2009 – June 2010 decline and the pair’s 200-day Simple Moving Average. On the US Dollar side, the widely-followed Dollar Index is currently at risk of breaking below a long-standing trend channel and its own 200-day moving average.

The coming week may prove critical in determining broader EURUSD trends if we see a test of the key 1.3500 handle. Euro bulls may look to protect profits on a potential failure at said level—especially as oscillators have reached heavily overbought levels on daily charts. - DR