By: William Doody
Currency traders face a relatively light week in terms of U.S. economic data. On Monday, the Conference Board’s report of leading economic indicators for June will be released and on Thursday, the Department of Labor will release initial jobless claims data for the previous week. Again, in recent weeks, the Dollar has strengthened with negative data and weakened with positive data, so traders should keep this “risk trade” phenomenon in mind when plotting their positions. Both sets of data are expected to be relatively flat, as economists suggest that the U.S. economy may have finally reached a trough. Meanwhile, equity markets will be preoccupied with a flood of corporate earnings reports. Better-than-expected results will most likely weaken the Dollar, as traders move funds to equity positions or to riskier, but higher-yielding currency bets.
For the past month, the Dollar has been relatively range-bound versus the Euro, holding between $1.384 and $1.415. The most likely catalyst to move trade one way or another is corporate earnings. Good results from European companies will most likely strengthen the Euro, as fears concerning the pace of Eurozone recovery will be reduced. Meanwhile, good results from American companies will likely weaken the Dollar as there will be less incentive for “safe haven” trading. We would advise traders to move with caution considering the unpredictable nature of earnings season. Based on very early reports from some U.S. companies, it seems as though results may be trending somewhat better than many analysts expected.
On the basis of positive earnings surprises, we would open a small EUR-USD position favoring the Euro.