Euro Gains on Geopolitics & USD Strains

by Ashraf Laidi
Dec 29, 2008 14:03 | 1 Comment

Euro strength and dollar weakness further emerge in thin trading activity as geopolitical uncertainty creeps higher (Israel-Hamas & India-Pakistan), giving gold a $13 boost to a 10-week high of $890/oz and more than a $5 rise to crude oil at $42.17 /barrel. The escalating violence between Israel and Hamas served as the main catalyst to oils $5 rise as Israels rocket attacks of Gaza reached their third day, raising speculation of a ground offensive of the Palestinian city. Mixed reports of troop redeployment by Pakistani military towards the Indian border were dampened by news that the two nations military officials have exchanged talks. This weekend marked the 1-year anniversary of the assassination of former Pakistani PM Bhutto, an event, which resulted into a $30 climb in the price of gold in less than a week.

Euro Gains on Geopolitics & USD Strains - Gold Dec 29 08 (Chart 1)

Aside from geopolitics, gold and oil are also boosted by a return to broadening USD weakness, especially in the aftermath of last weeks jobless claims and personal consumption reports, which illustrated the accelerating path of unemployment and appreciating rate of decline in inflation, both of which highlight the need for the Federal Reserves latest push on the reflationary pedal.

Euro Extends Anti-Dollar Gains. Euro's anti-dollar attribute is being underscored by: (i) the ECBs reluctance to telegraph further easing as in the case of the BoE (ii) the aforementioned negative releases from the US and (iii) the ensuing geopolitical uncertainties from the Middle East and South Asia. Euro strength is creeping across the board, hitting fresh all time high vs GBP at 0.9795, paving the path for parity as early as this week. One of the several factors making parity possible is remaining technical strength in EURUSD, which is likely to retest its 200-day moving average (tested 2 weeks ago) currently at $1.4650. The level also marks the 61.8% retracement of the decline from the $1.6037 high to the $1.2328 low. And finally, despite USDJPYs breach under 90 yen, EURJPY easily penetrated through the 129 yen figure, eyeing 130.50 and 131. For more detail on the intricacies of the euro's attribute as the anti-dollar, see pages 75-77 of my book regarding the evolution of the EURUSD trading pair and the historical illustration of the pair since the euros inception.

Gold Eyes $926. Gold breaks a key resistance of $880, which marked the trend line extending from the July 15 high and the 61.8% retracement of the decline from the said high to the $698 low of Oct 23. A simple look at the weekly chart below demonstrates how the trend line resistance was tested at 2-month intervals, suggesting that the last 2 weeks of December may mark the break of the 8-week cycle pattern, and a breach of the trend line, paving the way for a possible reading of $920 by weeks end. While a daily chart of gold clearly shows a break of the 5-month trend line resistance, the weekly chart below does not yet this breach.

Comments (Showing latest 1 of 1) View All Comments
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Dec 29, 2008 18:09
Answer to JOSEPH regarding his question on EURUSD in another section of this website. Yes, $1.4650 is a solid resistance that once tested is likely to send euro back towards $1.3200s. PPP theory in forex takes time to develop (about 5-7) years. Just because ECB interest rates are not at zero% does not mean it is behind the curve. Let us not forget about the depth and speed of the break US economic growth and market/household wealth, which continues to prove a real surprise for Federal Reserve officials up to this day. In April 2007, Bernanke said US housing is primarily limited to subprime (defaults soared in May). In June 2007 he and his colleagues still deemed inflation as the real danger (they slashed rates in August). In July 2008, they had the market believe rates were going up in September 2008. Do you see the pattern?