EUR/USD Weekly Outlook 6/1 thru 6/6 2008

I hope you got some good rest over the weekend as this week carries a high probability to be volatile with all the key data we have on the books.

In addition to the ECB rate decision, Trichet press conference, and NFP, we also get tons of growth, production, and consumer data for both the U.S. and Eurozone. Plus, we get two speeches by Bernanke and a total of four speeches by Trichet. And if that wasn't enough, we also get speeches from Kroszner, Lockhart, Plosser, and Bullard.

Both the Fed and ECB will be talking about their respective economic situations, monetary policy, inflation, growth, and their economic futures. As you plan your trade week, don't forget to factor in the Fed and ECB's market-moving powers...

Thursday and Friday will be the most critical trade days this week. The ECB, Trichet, NFP, and the Unemployment Rate will take center stage. But don't expect the market to just sit around and wait for Thursday and Friday's data... we will be moving this week and we are inching even closer to a bigger extended move out of the relatively tight range we've been trading in the past 2-3 weeks.

Tomorrow:

As soon as Wall St. opens tomorrow we'll get Trichet's first speech of the week. I'm not expecting him to say anything earth-shattering tomorrow and he's not scheduled specifically to talk about monetary policy but it's important we listen nonetheless.

ISM is our big news on Monday. I'm not officially ready to call a bottom on the U.S. manufacturing downturn but I do believe the worst of the weakness has been felt by the economy and absorbed by the market.

Based on my research I believe we see the manufacturing sector begin to make some small gains and take back some ground that has been lost the past 12-14 months. Manufacturing employment has begun to stabilize, inventories are flowing more in positive territory, and prices paid are looking more and more inflationary... all of those factors are USD+.

The market will pay close attention to the employment and prices component in tomorrow's ISM data. With the continued high cost of fuel I would expect the prices component to print to the upside. Overall, ISM should print at or above market consensus.

The other thing to keep in mind with this week's fundamentals is the fact that we are starting a brand new month this week. Banks and traders have already squared their books for May and will be looking to re-position for the current month.

Certainly gold and especially oil will stay in the market's focus this week. Last Thursday crude inventories printed way to the downside but we didn't see a whole lot of reaction to the shockingly low number. If there is a reaction, it could come early this week.

Should commodities continue to push north and test the upside obviously this will keep the euro well supported vs. the dollar. If the opposite occurs, well, you know what the result will be...

Bonds:

I haven't said much about the 10-year the past few weeks mostly because it's been ranging as the market has been trying to figure out what to do with the euro and the dollar. But I want you to keep an eye on the 10-year this week.

The 10-year has been brought off life support and certainly gave the USD a boost last week as the yield made gains up above 4.10%. What does this tell me? Well, first of all, it only further confirms my opinion that the Fed is done cutting interest rates.

If the bond market wanted more rate cuts or thought that more rate cuts were coming we wouldn't be seeing the 10-year yield firmly above the 4.00% level right now. The moves in bond yields are such great overall market indicators, especially if you trade the EUR/USD.

EUR/USD:

Monetary policy, interest-rate connected fundamentals, commodities, and key price levels are all the flavor of this week's trading for the EUR/USD.

I'm still overall bearish on the euro but at this point on Sunday I have no reason to change up my trade plan. The euro has been falling at some key upside levels and the dollar has been falling at some key downside levels and this is why we've been in a range, floating back and forth through some precarious price levels.

Staying firmly above the 1.5380 level will keep any dollar gains capped for now, and staying below the 1.5800 level will cap any big euro gains for now. The dollar is still fundamentally weak but the euro is picking up more momentum to becoming fundamentally weak.

This is why Trichet's comments on Thursday will be so critical to the near-term future of the euro. Slowing Eurozone growth has kept Trichet unable to raise rates and strong upsides to inflation has kept him from cutting rates. I still believe we can see an ECB rate cut of 25bps before 2008 is done, but the market has not been given any real signals of this happening yet.

As far as trading goes, I will continue to buy the euro on dips and short the euro on the rises.

I don't have any key levels yet as the market is still several hours from opening, but overall, in order for the euro to make any real topside gains the euro will have to sustain a break of the 1.5670-1.5730 levels. If we make several repeated failures at the 1.5600 level this would be something to take note of.

I would urge you to be strict with your risk and money management disciplines this week. If you don't see a trade, don't take a trade. Wait for your price, wait for the market to come to you, and please don't make any knee-jerk trades. You do not have to be in the market every waking moment -- it's OK to be flat and to wait for the trade to come to you!

Be smart -- don't overleverage your accounts -- don't take dumb trades -- allow the trades to come to you...