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Euro Straddles 1.2000
By Boris Schlossberg | Published  11/2/2005 | Currency | Unrated
Euro Straddles 1.2000

The Fed went to 4% and yet the euro did not decline.  The move was more surprising given the fact that Germany, the union's largest and most important member appears to be on the brink of yet another political crisis, as the much beleaguered "grand coalition” government of Angela Merkel sustained defections from both the right and the left  Mr Stoiber, who is the leader of the Christian Social Union (CSU), junior partners in the conservative alliance led by Mrs. Merkel said he would prefer to stay in Bavaria - Germany's most prosperous state - than risk his fortunes in Berlin. Meanwhile on the left, Franz Münterfering, designated vice-chancellor in the planned grand coalition, resigned as head of the SPD on Monday in an internal struggle over the leadership and the direction of the party. Despite the setback, Mrs. Merkel appeared resolute in her desire to from a government by the November 11 deadline.  

Nevertheless, the odds of a new election in Germany have increased markedly since these developments took place and yet the euro appears unaffected trading calmly around the 1.2000. One possible reason may be the market's overall disdain towards the notion of a coalition government.  Typically, the FX markets abhor political uncertainty and react accordingly, however in this case market players may actually wish to see a new election in Germany that would produce a more definitive result.

The economic calendar today is most notable for absence of any  major releases from either Asia EU or North America. German unemployment printed worse than expected at -36K versus -18K consensus, but the results were leaked yesterday and the market shrugged off the news since the data is still going through a major statistical adjustment to comply with Germany's tough new unemployment rules. Still, the greater than predicted gain in unemployment hardly bodes well for the euro as it shows that despite the recovery in the Industrial sector, job growth remains anemic. 

Job growth will soon take center stage in US, as  NFP results approach Friday's release date.  The currency market will begin to focus on whether the US economy has been able to recover from the shock of Katrina, with most analysts forecasting a gain of 100K in payrolls from last month's -35K decline. The US unemployment number will be key  not only to gauging the underlying strength of the Us economy but also to the  possible direction of Fed monetary policy beyond the end of this year.

Boris Schlossberg is a Senior Currency Strategist at FXCM.