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EURO-DOLLAR HANGING IN THE BALANCE

DIRECTOR OF CURRENCY RESEARCH, GFT

Although the year is barely two weeks old it is already becoming abundantly clear to most currency traders that rates on both sides of the Atlantic are like to remain stationary for most of 2010. Last Thursday, at the European Central Bank’s monthly press conference, president Jean-Claude Trichet provided a rather subdued assessment of Eurozone growth prospects. He went as far as to acknowledge the possibility that the region could see a negative quarter some time next year.

Meanwhile, the US data was not much better. After a horrid non-farm payrolls number the previous week, FX markets were discouraged with last Thursday’s US retail sales figures which came in at -0.3 per cent against estimates of a 0.5 per cent gain. The report was particularly disappointing given that data from a variety of US retailers showed a strong pick-up in activity in December,

Unfortunately, neither the European data nor the US economic releases provided any positive guidance to the market, which left euro-dollar range-bound. The pair continues to fight what I call the war of attrition as it bounces in a narrow 300 point channel between $1.4250-$1.4550. This type of low volatility price movement could continue for the foreseeable future if neither economy shows any clear signs of improvement relatively soon.

This week the economic calendar remains barren. However, one key release that could provide some clarity will be the Eurozone flash PMI reading for January, which is due this Friday. If it declines for the first time in nearly a year it will signal that the recovery in the 16-member region may be losing momentum as higher exchange rates and weak consumer spending stifle growth. If the numbers surprise to the downside, the euro could test the bottom of its recent range near the 1.4300 level as traders push back their expectations for an interest rate hike.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read daily commentary on currencies at www.GFTUK.com/commentary or e-mail BorisandKathy@gftuk.com.