Euro was in the process of recording the first winning  day in five in early European trade as healthy German Trade Balance numbers and a diminution of hostilities in France offered euro longs the first shred of good news in a week. German Trade Balance printed at 15 billion euros vs. 13 Billion anticipated indicating that Euro-zone largest and most important economy continues to benefit from the lower exchange rates. With euro rates continuing to decline in  October and November, export-led demand should serve as a powerful growth catalyst for the EZ's economy as a whole.  Should that trend continue, ECB will be hard pressed to keep rates at the artificially low 2% level, as inflation itself  remains above the bank's 2% target. Overall, we are setting up for a strong divergence between the unit's favorable underlying fundamentals and recently abysmal price performance.

However, the political risks in France remain a serious concern. Although the latest series of initiative by the French government including the introduction of curfews may finally bring the situation under control. As we noted yesterday one positive trigger for euro bulls may be the US Trade Balance data due 13:30 GMT on Thursday. If the report prints as expected at -$63 Billion or worse it will stand in stark contrast to ample trade surpluses out of Germany. Nevertheless, with so much technical damage done to the currency, any rally to the 1.1900-1.2000 level will most likely be  viewed as a fresh opportunity to get short the pair.

For unabashed dollar bulls however, we issue only one word of caution. Yesterday Toll Brothers, the key player in the US housing sector posted an earnings warning stating that demand for new houses has slowed.  Given the fact that housing has been responsible for fully 25% of growth in new US employment, including fully 50% of last month's NFP report, news of contraction in this critical sector suggests that US economy may be on the verge of a stall or worse yet - a recession. Should the market consensus start to coalesce around this theme, the dollar rally much as it is hard to fathom the idea at present, would stop dead in its tracks as traders will begin to price in an end to the Fed rate hike cycle.  As we have noted many times in the past, housing remains the lynchpin of US economic growth and depending on whether we see a soft landing or a drop off a cliff in the demand for this product, the dollar will respond accordingly

Boris Schlossberg is a Senior Currency Strategist at FXCM.