Market News

The dollar was firmer on Friday, albeit in thin and inactive markets. All eyes will be upon the FOMC meeting on Tuesday. It is a 99% certainty that rates will go up 0.25%.

The European Central Bank meet on Thursday, and with more hawkish comments from board members over the weekend, the market is now pricing in a 50/50 chance of a 0.25% rate hike before the year end. European rates currently stand at just 2%. A shift in the Euro rate outlook has been halting the Euro’s recent slide against the dollar, and could see gains for the Euro if this outlook is strengthened at the coming meeting. I don’t expect a rate hike this time, but the tone of the comments made will be key to Eurodollar price action over the next few weeks.

GBP EUR – Support 1.4650 then 1.4600
Resistance 1.4745 then 1.4810

GBP USD – Support 1.7715 then 1.7630
Resistance 1.7860 then 17900

DATA: UK Consumer Confidence (10:30 GMT)
Chicago PMI (purchasing manager’s index: 15:00 GMT)

The dollar has been creeping back up against Euro and Sterling, with last week’s momentum seemingly dissipated. Bush’s nomination of Ben Bernanke as next Federal Reserve president turned the dollar weaker for a few hours as analysts pointed out that Bernanke was likely to be less aggressive in raining interest rates than Alan Greenspan.

Business confidence figures from Germany are expected to show a slight improvement today, which could drive a Euro rebound in the short term.

Analysts seem divided over the likely direction of the Yen, with a Bloomberg survey giving estimates between 119.00 and 110.00 by the year end!….currently trading 115.60. The Yen’s weakness has dumbfounded some commentators, since soaring stock markets and indications from the central bank that rates will soon rise from close to zero should give the currency a boost.

GBP EUR – Support 1.4740 then 1.4700
Resistance 1.4800-10

GBP USD – Support 1.7630 then 1.7600, 1.7550 (long term trend support)
Resistance 1.7730 then 1.7800

DATA: German IFO Index – 09:30
UK CBI Industrial Trends 11:00
US Consumer Confidence 15:00

Cable and Eurodollar continued to rally yesterday, with sterling strength being the main theme in the markets. The dollar failed to rally on the Philadelphia Fed’ figures, which were hugely above analysts expectations (17.3 vs expected 10!!!). This was a sure indication that the appetite for dollars has diminished greatly over the past few days, and both cable and Eurodollar continued to grind higher.

UK Retail Sales were slightly better than expected yesterday, showing small growth on the month, but still an overall decline on the year.

UK GDP data (09:30) should show a 0.4% rise for the third quarter and 1.6% year on year. Anything below this could leave sterling vulnerable today.

GBP EUR – Support 1.4700-1.4720 then 1.4670
Resistance 1.4785 then 1.4870

GBP USD – Support 1.7700-35 then 1.7600
Resistance 1.7800-20 then 1.7930

DATA: UK GDP (09:30) – Expecting +0.4% on quarter, +1.6% on year.

The Dollar made a new high against the Euro in early trade yesterday, but a sharp reversal ensued from there, and both Euro, Dollar and Cable ended the session looking fairly bullish. There is so much fundamental news already “built in” to the Dollar rally, so it’s not surprising to see it running out of steam around these levels. The EUR USD low was just 4 pips above the July low (major support).

Hurricane Wilma is also weighing slightly on the Dollar.

Sterling continued to rally strongly versus the Euro, breaking into new highs as I type. The MPC minutes revealed a unanimous 9-0 vote to leave rates unchanged at the last meeting, cementing growing expectations of no further cuts this year. This explains Sterling’s strength.

GBP EUR – Support 1.4700 then 1.4660
Resistance 1.4770 then 1.4835

GBP USD – Support 1.7595 then 1.7540
Resistance 1.7670 then 1.7733

DATA: UK Retail Sales 09:30 (expecting +0.6% on the month)
US Jobless Claims 13:30
Leading Indicators 15:00
Philadelphia Fed’ 17:00

We have seen serious Euro weakness overnight, which is why GBP EUR is higher, EUR USD is much lower, but Cable is relatively static. Dollar strength is also evident as President of the San Francisco Fed’ Bank suggested rates may need to go as high as 5.5% next year to contain inflation. (In my opinion this will not help, since the inflationary pressures are almost solely due to rising world energy prices, which cannot be influenced by monetary tightening!)

Yesterday’s Inflow from Foreign Investment figures showed that investors ploughed over $91Billion into US assets in August, versus analysts expectations of $60Bn. This helps to explain the sustained dollar strength.

GBP EUR – Support 1.4600 then 1.4560
Resistance 1.4740 then 1.4770

GBP USD – Support 1.7420 then 1.7388
Resistance 1.7520, 1.7535 then 1.7570

DATA: Bank of England minutes (09:30)
US Housing starts (13:30) – This isn’t usually a very significant figure for currency markets

UK CPI rose at its fastest rate since records began in September(1997) according to the Office for National Statistics. A rise of 2.4% for the third quarter was above the Bank of England’s 2.2% target. However, the figure was still lower than many analysts expectations, which is why we are seeing sterling weakness in the first few minutes since the data release at 09:30

The dollar drifted higher yesterday amidst a lack of any real data to give the market impetus. Despite Friday’s double blow of rising inflation and falling industrial production, it is believed that the dollar is being supported by massive investment flows into US stocks from foreign investors.

Sterling was considerably weaker, closing below the important 1.4600 pivot level. This leaves a bearish tone for today, with the market looking to have firmly rejected the 1.4600+ area.

GBP EUR – Support 1.4552 then 1.4500
Resistance 1.4600 then 1.4675

GBP USD – Support 1.7475 then 1.7388 (recent low)
Resistance 1.7540 then 1.7635

DATA: UK CPI (09:30)
US Producer Price Index (13:30)
US Net Foreign Securities Purchases

Friday’s inflation data from the US was the main news of the day, with energy prices in the wake of hurricane Katriana contributing to the 1.2% CPI figure. This was the largest gain in 25 years!

There is a two-fold impact from this news. Firstly, it absolutely cements the view that the Federal Reserve will raise interest rates in November, and probably again in December in an attempt to cool the economy. This would usually be bullish for the dollar, but the figures were so high that the worry now is of dollar devaluation. If prices are rising rapidly, a dollar tomorrow buys you less than a dollar today, and this means the currency is devaluing against others. The market has been holding onto the belief that the Fed’s interest rate rises will stop inflation in its tracks, and that the main outcome will simply be higher rates, which draw in investment flows and prop up the dollar.

The worry now is that the Fed’ is not in control of inflation, because the main contributor is rising energy prices, which they are NOT able to influence. This is why the dollar was sold off after the data releases on Friday.

GBP EUR – Support 1.4600 then 1.4500
Resistance 1.4655 then 1.4700

GBP USD – Support 1.7600 then 1.7535
Resistance 1.7735 then 1.7820

DATA: US Empire Manufacturing Index (13:30) – Forecast 15.00

The European Commission is “optimistic” about the state of the Euro economy according to comments from Jean-Claude Trichet yesterday. He also stated that European interest rates are at the “right level”, but expressed some concern about inflation. Higher energy costs are driving inflation, and this increases the possibility that the ECB will raise rates to keep inflation in check.

Sterling also received a boost yesterday when two members of the Monetary Policy Committee also made comments skewed towards inflationary fears. After building speculation that we would see a rate cut in November or December, the two members expressed concern over high oil prices. Walton indicated that the MPC was now more united in its outlook than when they voted 5-4 for a cut in August. This suggests that November will be a “no change” vote. Sterling reacted strongly, driving up through 1.4600 Vs the Euro, reaching a high of 1.4655 but settling back to close a couple of ticks below the big level. We all know by now that 1.4600 is major resistance!

GBP EUR – Support 1.4600 (if we’re trading above!) then 1.4500
Resistance 1.4655 then 1.4700
GBP USD – Support 1.7500 then 1.7445
Resistance 1.7575 then 1.7635
DATA: US Retail Sales (13:30) – We’re expecting a 0.4% rise for September
US Industrial Production (14:15) – A 0.2% fall is expected. More important is capacity utilization, which should be 79.6%. A higher figure will be inflationary>>>bullish for the dollar.

Greenspan’s comments failed to have much effect on the dollar yesterday, with only a mild dollar sell off during the day, quickly erased overnight.

Against the Yen the dollar has remained consistently firm, despite soaring Japanese stock markets and a generally better economic outlook.

GBP/EUR remains unchanged, trading within a tight range again yesterday after the severe falls last week. The failure of sterling to retrace even a third of last week’s losses is probably an indication of further weakness to come.

The focus today will be on the US Trade Deficit at 13:30. We are expecting a deficit between $59.5 – $60.0 Bn for August, up from $57.9Bn in July. The market is already braced for a bad figure, but anything over 60 could result in dollar weakness this afternoon. This is likely to be offset by Friday’s Retail Sales and Industrial Production data which is likely to add to the inflationary theme, cementing the Fed’s intentions to raise rates again in November.

GBP USD – Support 1.7400, 1.7310 then 1.7269(July lows)
Resistance 1.7453 then 1.7520

GBP EUR – Support 1.4500 then 1.4400
Resistance 1.4600 then 1.4650

DATA: US Jobless Claims 13:30
US Trade Balance (Aug’) 13:30