Forex Focus August 25th to 29th 2008
Dollar rally pauses as oil rises and stocks fall
Also see latest newsletter and our economic calendar for more details and background info.
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A week of rising oil prices saw the dollar consolidate after its recent rally. The euro posted its first gain against the greenback in six weeks and USD/JPY closed lower, marking the first drop in three weeks. Sterling, however, continued to lose ground after GDP numbers saw UK growth grind to a halt ending the country’s longest period of economic expansion in a century...
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Monday saw the euro (chart 1) continue its fall against the greenback. However, Tuesday’s release of a high German PPI and better than expected ZEW numbers saw the euro find support at its low of the week at around 1.4650. The euro rise was slowed by US PPI coming in higher than expected supporting the view that the Fed’s next move regarding interest rates would be up. However, the dollar came under pressure as oil prices surged and equity prices fell. US housing numbers were also weak and the euro closed the day testing 1.48. Wednesday was a quiet day in terms of economic data and the US dollar recovered to 1.47 as oil prices eased back on the news that US oil inventories had risen by much more than expected and US and European equities rebounded. Mixed European PMI numbers left little impression on the markets. However, the pair started moving north as oil prices roared above the $120 a barrel level amid mounting geopolitical tensions following Russia’s decision to suspend military cooperation with NATO. The Euro rise was helped on its way by weak Philly Fed manufacturing numbers and the news that both South Korean and Chinese parties had walked out on secret talks to sell a 50% stake of the beleaguered investment bank, Lehman Brothers. The euro hit week highs of around 1.49 as Thursday ended. Friday brought relief to the greenback. Oil fell back to $114.66 a barrel and news broke that the Korea Development Bank was ‘considering’ an investment in Lehman Brothers, sending bank stocks higher. The dollar recovery paused at 1.48 after Ben Bernanke indicated that the Fed should be able to maintain low interest rates because falling commodity prices and the global slowdown should reduce the threat of inflation. However, EUR/USD went on to close the week a tad below 1.48 at 1.4792.
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Chart 1 EUR (hourly)
Just like EUR/USD, Sterling/Dollar (chart 2) was moved more by oil and equity prices than economic data releases. Wednesday’s MPC meeting minutes showed there was a three-way split in voting for the second month running and neatly illustrated the dilemma that the Bank of England finds itself in. Thursday’s UK Retail Sales came in surprisingly strong and suggested that consumer demand remains firm in the face of a deteriorating economy. However, it was Friday’s UK GDP numbers that had the biggest impact when they were revised down to zero growth, suggesting that the Bank of England will have to consider a rate cut to stimulate the economy. The news sent sterling plummeting to its lowest level since July 2006 and it closed the week at 1.8526.
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Chart 2 GBP (hourly)
Calendar Highlights
Calendar Highlights
US calendar highlights include the FOMC meeting minutes on Tuesday and more housing data on Monday and Tuesday. There will be lots of data on US economic activity including Durable Goods Orders on Wednesday, preliminary GDP on Thursday and Personal Spending on Friday. You can touch base with the US consumer twice this week with the Conference Board Consumer Confidence Index on Tuesday and the University of Michigan Consumer Sentiment on Friday.
Euro watchers should keep an eye out for key German data including Consumer Confidence and Ifo numbers on Tuesday, Preliminary CPI which is released throughout Wednesday and unemployment numbers on Thursday. Euro zone inflation is surveyed in Friday’s Flash CPI.
I hope all my viewers in Britain enjoy the Summer Bank holiday on Monday. Thursday is probably the busiest day for UK economic indicators including Nationwide house prices, the Confederation of British Industry’s retail numbers and consumer confidence.
Full economic calendar here
Forecast
Currency traders need to keep a close eye on a number of factors at the moment. Oil prices are particularly important at present of course. The dollar tends to fall as oil prices rise and vice versa. A second key factor is the US financial sector with both the Fannie Mae and Freddie Mac situation and Lehman Brothers’ search to raise capital before the mid-September earnings report. If the Korean deal for Lehman Brothers goes through, then the dollar should strengthen. If it falls through, watch out for dollar weakness. You should also never discount the importance of the interest rate differential and if US data is weak, then look for a rise in the euro.
We see EUR/USD finding support at 1.46 and resistance at 1.4950.
If GBP/USD breaks through the current support at 1.85, it could break to 1.8370. It will find resistance at 1.8850.
USD/JPY will encounter resistance at 110.65 and support at 107.20.
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