The euro powered higher against the U.S. dollar for the third consecutive trading day, leading investors to wonder whether this breakout has created a new trend in the EUR/USD. While we respect the move in the currency and caution traders against picking a top, volume tends to be low in the last 2 weeks of August, which means the short squeeze could be exaggerated. Eurozone PMI numbers were better than expected but that is not enough to explain the move. Instead, it’s the hope for more progress in Europe and the adjustment in monetary policy expectations from the Fed that is fueling the rally in the euro. In the latest cycle of the rumor mill, we are hearing that Spain could be seeking a sovereign bailout. It is important for traders to understand that nothing substantial has been confirmed from European policymakers and the FOMC minutes reflects the Federal Reserve’s opinions based on stale data. In other words, we need clarity from the ECB and the Fed, which we should get at the ECB meeting in September and Bernanke’s Jackson Hole speech on August 31st before declaring that the EUR/USD has officially reversed its trend.

Meanwhile the U.S. dollar is being punished for another round of weaker economic data that reinforced the possibility of more stimulus from the Federal Reserve. While we don’t believe that the uptick in jobless claims and smaller rise in new home sales is enough to warrant a shift in monetary policy next month, the data comes at a terrible time for the U.S. dollar, because investors are already readjusting their QE3 expectations. Jobless claims rose to 372k last week from 359k to the highest level in one month. Continuing claims also increased slightly to 3.317 million from 3.13 million while the 4 week moving average ticked up to 368k from 364k. The increase in jobless claims raises concerns about the non-farm payrolls report scheduled for release in September. If job growth in August falls short of 100k, the short squeeze in the EUR/USD could become a new trend.

New home sales also missed expectations but the details provided some cause for optimism. While sales rose a mere 3.6% in July compared to a 4.3% forecast, the absolute number of homes sold reached a 2 year high. When combined with the increase in existing home sales, we are seeing clear signs of a recovery in the labor market. Home owners and builders have had to lower prices to move inventory but at least sales are occurring which means that low interest rates are working.