Forex: U.S. Dollar Mix On Thin Trading, Euro Holds Tight Range

Talking Points

Japanese Yen: Mixed Against Majors
Pound: U.K. Banks Raise Borrowing Costs
Euro: Holds Narrow Range For Third Day
U.S. Dollar: ECB Trichet, Fed’s Yellen on Tap

 

The Euro fell back from a high of 1.4006 during the overnight trade to maintain the narrow range from the end of the previous week, and the exchange rate may hold steady throughout the day as the economic docket remains fairly light for Monday. The EUR/USD was unphased by the comments from the European Central Bank as price action held within a 90pip range, but the speech by central bank President Jean-Claude Trichet scheduled for 16:00 GMT could spark increased volatility in the exchange rate as investors weigh the outlook for future policy. ECB board member Guy Quaden said the Governing Council may decide to normalize monetary policy further in the first quarter of 2011 as he expects the region to grow at a “slower, more moderate pace,” and went onto say that current policy remains “appropriate” during an interview with Bloomberg News.

 

At the same time, Governing Council member Lorenzo Bini Smaghi held a hawkish tone during an interview with Market News International and said “some inflationary pressures” are becoming apparent, led by higher energy costs, and the central bank may look to reestablish its exit strategy going into the following year as they maintain their one and only mandate to ensure price stability. ECB President Trichet may talk up the likelihood for a rate hike in the beginning of 2011 as the outlook for growth and inflation improves, and hawkish comments from the central bank head could drive the EUR/USD higher going into the end of the year as market participants speculate the Federal Reserve to increase quantitative easing at its next rate decision in November. However, as the recent rally in the euro-dollar remains overbought, with the daily relative strength index holding at 77, a corrective retracement may unfold in the days ahead, which could lead the pair to test 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, for near-term support.

 

The British Pound bounced back from a low of 1.5913 during the European trade, with price action holding above the 10-Day moving average at 1.5850, and the GBP/USD may continue to trend higher over the near-term as it maintains the rally carried over from the previous month. As a result, the pound-dollar may make another run at 1.6000 later today as it retraces the overnight decline, but a shift in market sentiment could push the exchange rate lower as the U.S. dollar appears to be regaining its footing against its major counterparts. Meanwhile, a report by the Bank of England showed commercial lenders in the U.K. raised the cost of two-year fixed mortgage rates with a 25% deposit in September to 3.79% from 3.74% in the previous month, and the central bank is likely to maintain a dovish outlook for future policy as household and businesses continue to face tightening credit conditions. The BoE minutes due out later this month is likely to show the majority of the MPC vote to maintain its current policy in October, but a three-way split within the central bank could trigger a selloff in the British Pound as investors speculate the board to expand QE in the coming months.

 

U.S. dollar price action was slightly mixed overnight, with the USD/JPY slipping to a low of 81.71, and the greenback could face choppy price action throughout Monday’s trade as the U.S. bond market remains closed in observance for Columbus Day. With no scheduled event risks, risk trends are likely to dictate price action as the equities market are set to open their doors, but here could be a shift in market sentiment as members of the Fed are scheduled to speak throughout the day.

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Forex: Bearish U.S. Dollar Sentiment Gathers Pace, Euro Breaks Narrow Range

Talking Points

Japanese Yen: Mixed Amongst Major Currencies
Pound: BOE’s Posen Sees Scope For Further Easing
Euro: ECB Says Rates ‘Appropriate’
U.S. Dollar: Producer Prices, Trade Balance on Tap

 

The U.S. dollar weakened further against its major currency counterparts, with the EUR/USD rallying to a high of 1.4121 on Thursday, and the bearish momentum behind the greenback may carry into the end of the week as investors expect the Fed to expand monetary policy further. As EUR/USD breaks out of the narrow range from earlier this week, we are likely to see the pair continue to retrace the decline from earlier this year, and euro-dollar looks poised to make a run at 1.4440-50, the 78.6% Fibonacci retracement from the 2009 high to the 2010 low, as price action holds steadily above the 61.8% Fib around 1.3890-1.3900. With the 50-Day moving average (1.3158) approaching the 200-Day SMA at 1.3165, the bullish crossover suggests that the exchange rate will continue to push higher throughout the month, but there could be a corrective retracement in the coming days as the recent rally remains overbought. Given the strong bearish sentiment underlying the greenback, we would need the RSI to fall back below 70 to see a pullback in the exchange rate, and the rally may carry into the following week as the index bounces back to 78.

 

Meanwhile, the European Central Bank reiterated that the interest rate is “appropriate” in its monthly report and went onto say that price growth remains contained as the ongoing slack within the economy bears down on inflation. At the same time, ECB board member Yves Mersch said that the recovery in Europe remains in-line with the central bank’s forecast and that the recent slew of soft data “does not warrant increased pessimism” for the region, but went onto say that it remains “too early to claim victory” as the economic outlook remains clouded with uncertainties. As the Governing Council maintains a neutral outlook for future policy, the ECB may look to reestablish its exit strategy going into 2011, which would instill a bullish outlook for the single-currency in the beginning of the following year as the Fed maintains a dovish stance.

 

The British pound rallied to a fresh monthly high of 1.6066 during the overnight, and the exchange rate is likely to push higher going into the end of the week as carves out a short-term bottom around 1.5700, the 38.2% Fibonacci retracement from the 2009 low to high. As a result, the GBP/USD looks poised to test the 23.6% Fib around 1.6230-40, and the pair may continue to retrace the decline from the beginning of this year as the rally gathers pace. Meanwhile, Bank of England board member Adam Posen said that the global economy needs increased monetary stimulus according to an article in the Handelsblatt newspaper, and Mr. Posen may push to expand policy further in the coming months given the substantial amount of slack within the real economy. As a result, the British Pound is likely to face increased volatility over the following week as the BoE is scheduled to release its policy meeting minutes on Wednesday, and a three-way split within the MPC could spark a sharp selloff in the GBP/USD as market participants see scope for the BoE to expand quantitative easing further over the coming months.

 

The greenback weakened against all of its major counterparts, with the USD/JPY tumbling to a fresh yearly low of 80.88, but the dollar is likely to face increased volatility going into the end of the week as the economic docket is expected to reinforce a mixed outlook for future growth. Producer prices in the world’s largest economy is forecasted to increase at an annualized pace of 3.7% in September after rising 3.1% in the previous month, while the trade deficit is expected to widen to -$44.0B in August from -$42..8B in the month prior. However, market participants may turn a blind eye to the economic developments as they look towards the Fed’s interest rate decision on November 3, and comments from the central bank are likely to play an increased role in dictating price action as investors weigh the prospects for future policy.

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