Forex: Bearish U.S. Dollar Sentiment Carries Into October, Euro Extends Rally

Talking Points

Japanese Yen: Losing Ground Against Majors
Pound: Housing Withdrawals Fall Further in 2Q
Euro: Unemployment Pushes Higher in August
U.S. Dollar: Personal Spending, ISM Manufacturing on Tap

The Euro rallied to a high of 1.3763 during the overnight trade, and the single-currency may continue to push higher going into the end of the week as the bearish sentiment behind the U.S. dollar carries into October. After clearing 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, the EUR/USD looks poised to test the 61.8% Fib around 1.3890-1.3900 as it maintains the advance from the previous month. With the 50-Day moving average (1.3011) approaching the 200-Day at 1.3185, a bullish crossover could lead the euro-dollar to retrace the decline from earlier this month as the greenback continues to weaken against its major counterparts. However, as the near-term rally remains overbought, with the daily relative strength index increasing to 77, we may see a corrective retracement play out in the days ahead.

Meanwhile, European Central Bank board member Ewald Nowotny said the Governing Council will purchase government bonds as long as “inefficiencies prevail” in the financial market, and went onto say that the current situation in some areas remain sensitive as the governments operating under the fixed-exchange rate system struggle to manage their public finances. Given the ongoing weakness within the real economy paired with the uncertainties surrounding the future outlook, the ECB may see scope to maintain the expansion in monetary policy throughout the beginning of 2011 as it holds a dovish outlook for inflation. Meanwhile, the economic docket showed unemployment in the Euro-Zone unexpectedly increased to 10.1% in August to mark the highest reading since June 1998, but the single-currency showed little reaction to the data as it benefits from the weakness in the greenback.

The British Pound pared the decline from earlier this week to reach a high of 1.5872 on Friday after closing above the 38.2% Fibonacci retracement from the 2009 low to high at 1.5700 during the previous day, but the GBP/USD may consolidate going into the following week as investors maintain a cautious outlook for the U.K. A report by the Bank of England showed home equity withdrawals tumbled GBP 6.2B in the second quarter after falling a revised GBP 5.3B during the first three-months of the year, and the ongoing weakness in the private sector could lead the MPC to expand monetary policy further in October as it aims to encourage a sustainable recovery. If we see a three-way split within the BoE, speculation for an expansion in quantitative easing would spark a bearish in the British Pound as investors weigh the prospects for future policy.

The greenback continued to weaken against its major counterparts, with the USD/JPY slipping to a low of 83.15, and the dollar may depreciate further in the following as the bearish sentiment carries into October. As market liquidity tends to taper off ahead of the weekend, the greenback may continue to trend lower throughout the day, but the event risk scheduled for the U.S. trade could spark increased volatility in the exchange rate as investors weigh the outlook for the world’s largest economy. Personal incomes are expected to increase 0.3% in August, with market participants forecasting a 0.3% rise in private spending, while the ISM manufacturing index is projected to fall back to 54.5 in September from 56.3 in the previous month. The mixed batch of data could spark choppy price action in the U.S. dollar, but the ISM report is likely to be the biggest market-mover of the day as manufacturing leads the economic recovery in the U.S.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

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.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.