EUR/USD FUNDAMENTAL

The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3560 and was capped around the $1.3625 level. Technically, today’s intraday high was right around the 38.2% retracement of the move from $1.3260 to $1.3850. Data released in the U.S. today saw July producer price inflation rise 0.6% m/m, more-than-expected, while core prices were up just 0.1%, below expectations. Core PPI prices are up 2.3% y/y, the fastest annual gain since September 2005. These data suggest the Federal Open Market Committee will find it difficult to justify a monetary easing should ongoing credit dislocations warrant same. Also, the U.S. trade deficit receded to a four-month low of -US$ 58.1 billion. In eurozone news, European Central Bank President Trichet today said “We have provided in particular the liquidity which was needed to permit an orderly functioning of the money market. We experience a period of market nervousness, a period in which we see increased volatility in many markets and a significant re-appreciation of risks. In some respects, what has been observed can be interpreted as a normalization of the pricing of risk.” Traders interpreted this as an indication the ECB is becoming optimistic about the ongoing credit problems in the market and will begin to withdraw liquidity from the system. Trichet’s remarks were amplified by ECB member Weber. Data released in the eurozone today saw EMU-13 GDP growth of just 0.3% q/q and 2.5% y/y in Q2, the weakest pace since Q1 2005. Data to be released on Thursday include the final July harmonized inflation figures for the eurozone and if they come in weaker-than-expected, they could provide the ECB will enough breathing room to delay their next monetary tightening. Euro bids are cited around the US$ 1.3715 level.