Euro Zone Trade Surplus to Continue Shrinking, Threatening the Currency (Euro Open

The Euro registered impressive gains in overnight trading, rising over 100 pips to challenge 1.3250. The British Pound followed suit, moving sharply higher to test above the 1.48 mark. The Euro Zone Trade Balance is on tap overnight, with expectations suggesting the surplus shrank 57.1% in the year to November.
Key Overnight Developments• US Dollar Slips Lower Against Major Currencies

Critical Levels

The Euro registered impressive gains in overnight trading, rising over 100 pips to challenge 1.3250. The British Pound followed suit, moving sharply higher to test above the 1.48 mark.

Asia Session Highlights

With no market-moving releases on the economic calendar, broad US Dollar sentiment guided forex price action in overnight trading. The greenback corrected lower after the rally in New York hours: The Dollar Index, an average of the greenback’s value against six top currencies, fell as low as -0.7% after tested support-turned-resistance at the bottom boundary of a range that had contained USD consolidation since late October. A swathe of forthcoming US data also weighted the Dollar: CPI is expected to shrink -0.9%, Industrial Production is seen losing -0.8%, and the University of Michigan consumer confidence gauge is to slip to 59.0. We view this downturn as corrective, with broad technical positioning still favoring US Dollar strength.

Euro Session: What to Expect

Switzerland’s Producer and Import Prices are seen shrinking for the sixth consecutive month to bring the annualized growth rate to 0.6% in the year to December, the lowest in three and a half years. Falling wholesale prices telegraph further declines in consumer inflation as firms pass on lower production costs via cheaper finished products. The pace of price growth has slowed by a whopping 77.4% since peaking in July to print at a meager 0.7% in the year to December, substantially below the threshold 2% level. At this rate, deflation will become a pressing concern, opening the door for the Swiss National Bank to follow in the Fed’s footsteps towards quantitative easing.The Euro Zone Trade Balance is expected to show a 1 billion euro surplus, suggesting trading terms have deteriorated a whopping 57.1% in the year to November. The seasonally adjusted monthly shortfall is set to print at -4.8 billion euro, the largest since August. Continued deterioration in trading terms threatens the Euro: imports outpacing exports implies a net outflow of currency from the regional bloc into the market, making the Euro more abundant and thereby eroding its value. Meanwhile, the US trade deficit has been shrinking and printed at a five-year low in November. While much of the US Dollar’s recent strength has been attributed to its safe-haven status amid continued financial market turmoil, the developing trend in trade flows points to structural, long-term downward pressure on EURUSD.