There’s no Forex Review this week because I’m enjoying a fortnight in the sun. However, our team has put together this forecast:

 

Although the dollar finished the week strongly, we think that this respite will prove short-lived. Weak payrolls and manufacturing data limit the Federal Reserve's scope to reverse those seven interest-rate cuts. In our opinion, US rates will only be raised in December. Even if the ECB has no appetite for further hikes, the current rate differential favors the euro. At the same time, the fresh highs that oil continues to find will also exert pressure on the dollar. .Even US Treasury Secretary Henry Paulson reconfirmation of his strong dollar policy smacks of all talk but little action.

In this light we expect EUR/USD to trade within 1.5640-1.5850 with the resistance level coming under the most pressure. If 1.5850 is broken, the pair could jump to test 1.6000.

GBP/USD will most probably find resistance at 2.0020 and support at 1.9700.

USD/JPY will trade within 106.00 and 108.8 with carry traders continuing to put the brakes on any yen advance.

Go to http://www.coltfx.com/market-news-and-reviews-en/ for news about the next Forex Focus and this forecast.

 

There are no calendar highlights this week because of the summer break. Our full economic calendar gives you the complete rundown of the week’s economic news releases and events.

 

Aram is fresh back from the World Bank seminar in Washington DC. Here is this week’s article.

The carry trade takes advantage of interest rate differentials by buying the currency in a pair which has the higher interest rate. This enables the trader to benefit from swap as well as changes in the price of each pair.

EUR/CHF
By Tuesday last week, EUR/CHF had fallen to the week’s low of 1.601. The euro failed to strengthen against the franc despite the ECB’s move to hike the refinancing rate by 25 basis points on Thursday. If the currency pair drops to 1.593 we intend to sell Swiss franc against Euro.

EUR/JPY
EUR/JPY failed to break strong resistance at 169. In the light of high uncertainty over further hikes of interest rates in the Euro Zone, we suggest reducing, or at least not increasing any EUR/JPY longs at current prices.

The narrowing spread between the Euro and British pound interest rates had a negative impact on EUR/GBP from a carry trade perspective and by the middle of last week Euro had edged up to 0.800 against Sterling. Thursday saw the euro fall dramatically after the ECB president comments and the pair closed the week at 0.792. Our target stands at 0.763, a significant correction level.

GBP/JPY
Our GBP/JPY long continues to make a solid income for the second month in a row and should do so as long as British interest rates stay firm. GBP/JPY fluctuated between 210 and 212 last week. Our medium term target stands at 216.7, the mid-point of the recent downtrend. 200.9 would be a good level to load longs.
GBP/CHF
The British pound gained slightly against the Swiss franc, thanks to Trichet’s sensational comments. Nevertheless, the pair’s volatility remains low. We forecast an appreciation of GBP/CHF to 2.12 in the second half of the year. Only an ECB refinancing rate hike to 4.50% could cause a further decline in GBP/CHF.

USD/JPY
After an appreciation of more than 1200 pips over the last three months, the long-awaited correction of USD/JPY has started and it fell to 105. We think that 103.3 is a good level for buying. But the end of the Fed’s interest rate cuts and the moderate growth of Japanese economy will force investors to close their profitable USD/JPY shorts. Our medium term target is 109.7.

AUD/JPY
The Australian dollar has started to rise against the Japanese yen again. A high of 102.9 was reached last week. We intend to load a long if the price falls to 97.3.