Euro Rebounds as Rise in Oil Spurs a Rally - Time To Play The Weather?

Overnight Wire

• Gustav weakens to tropical storm status but expected to increase to hurricane strength by week-end
• Oil rebounds to $117 on fears of Gustav slamming into Gulf of Mexico at cat-3 strength
• Equity futures called 35bps lower as rise in crude weighs
• WSJ - FDIC may need to tap Treasury for liquidity after 9 US banks failed so far
• Gold up $8 at $838 as commodities bounce
• European economic calendar barren
• US Durable Goods and oil inventory numbers key event risks for the day

AUD/USD strengthens by a cent as bargain hunters and rise in commodities helps

USD/JPY Breaks 109 as drop in equities guides lower

GBP/USD Cable stages strong recovery as short covering kicks in

EUR/USD: back above 1.4700 as rise in oil offsets weak economic news

Euro Rebounds as Rise in Oil Spurs a Rally - Time To Play The Weather?

Yesterday we noted that " With sentiment towards the euro turning more negative by the day every rally becomes a selling opportunity and only a strong rebound in crude or new fears systemic risk in the US system are likely to provide it with any near term support." With crude prices spiking more than $2 in the past 24 hours the EURUSD has followed suit retaking the 1.4700 figure in overnight trade after coming perilously close to the 1.4500 level just 24 hours earlier.

The rise in oil has been fueled by fears that Gustav, which has weakened to a tropical storm as it passed Haiti, will regather strength and become a category 3 hurricane as it heads into the Gulf of Mexico by Labor Day weekend. Hurricane season of course turns currency traders into meteorologists as attention turns from price charts to weather maps and everyone tracks the progress of Gustav with keen interest.

With nearly 20% of all US oil production concentrated in the Gulf of Mexico, a hurricane with 115/mph winds could wreak havoc on the already fragile infrastructure of the oil markets. Add to that the fact that Russia has essentially annexed the two breakaway regions in Georgia and appears for all intents and purposes to remain in that country with the ultimate goal of toppling the Western friendly government of President Saakashvili and one can easily understand why oil prices could remain above $115/bbl for some time.

Higher oil prices are of course an anathema to the US economy. As we wrote yesterday, " US economy which is far less energy efficient than the Eurozone is highly leveraged to the price of lower crude and therefore likely to see greater positive impact on growth if gasoline prices drop to $3.50/gallon," Yesterday that scenario appeared likely. Today it does not, explaining much of the strength behind euro's overnight rise.

Oil may be a factor on the economic calendar today as well, as markets await the weekly inventory numbers which could either exacerbate or ease the conditions in the market. On the micro economic side traders will also get a look at the Durable Goods numbers at 12:30 GMT. The call is for a decline of -0.5% from the month prior and could pressure the greenback further if it misses to the downside.

Overall, this week's price action has been murder for momentum traders as every breakout has turned into a fakeout. The 1.4600- 1.4900 range continues to prevail and we see little on the horizon that will change the dynamics of this consolidation, for the rest of the week. As we approach the Labor day weekend flows are likely to subside and the primary point of interest will be Gustav's next move.

FX Upcoming

Currency GMT EST Release Expected Prior USD 12:30 8:30 USD Durable Goods Orders (JUL) 0.1% 0.8% USD 12:30 8:30 USD Durables Ex Transportation (JUL) -0.5% 2.0%

Boris Schlossberg
http://www.gftforex.com

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