Newsletter Archive

Forex Review August 11th to 15th  
Dollar makes multi-month highs
The dollar rally continued as US production data, European weakness and falling oil combined to power the dollar drive. The dollar closed the week at multi-month highs against all the majors.

The euro (chart 1) opened the week 50 pips lower than the previous week’s close. When the European session opened it rallied a little above 1.50 before dropping back to 1.49 against a background of falling crude prices. The pair traded within a fairly tight range mid-week but the current downbeat euro sentiment was reinforced by Wednesday’s worse than expected European Industrial Production, which saw growth in output grind to a halt. However, the euro slide resumed in earnest after the release of a raft of weak euro-zone numbers including contracting German and French GDPs. Euro-zone GDP also shrank by 0.2%,in the second quarter and the market is expecting even worse Q3 numbers after Trichet’s warning a couple of weeks ago. A few hours later higher-than-expected US CPI numbers gave the dollar further support. Friday saw European markets closed for the Assumption holiday and upbeat US manufacturing data fuelled the continuing dollar rally.  University of Michigan Consumer Sentiment saw confidence rise as gasoline prices fall in the US, though this rise was less than expected. The pair touched its low of the week late Friday before closing at 1.4687.

Chart 2 GBP (hourly)

Sterling (chart 2) fell 3% this week against the US dollar and has fallen each of the last 11 days, the longest stretch of declines since at least January 1971. The Royal Institute of Chartered Surveyors (RICS) started the bad news ball rolling late Monday evening when it revealed that 83.9% of its members reported that house prices were falling in their areas and although this was better than forecast, the Royal Institute described it as “a significantly low level”. More worryingly, the survey noted that housing transactions were at their lowest level since the survey began, with the lack of mortgage finance being singled out as the main culprit. UK CPI came in much higher than forecast @ 4.4%; its highest since the early 90’s. However, the UK slowdown makes any rate hike highly unlikely at present and after bumping along at 1.90 the pair closed the day at 1.8960. On Wednesday Sterling’s misery continued as worse than expected jobs data saw GBP/USD fall once again below 1.90. When the Bank of England published its inflation report an hour later, the pound slumped across the board. The Governor of the BoE, Mervyn King, said that inflation was likely to peak at 4.8% at the beginning of 2009 before starting to fall reaching 1.8% in 2010. He also said that there “will be a quarter or two of negative growth”. This led to growing expectations that the BoE was more likely to cut interest rates to kick start the economy rather than to raise them to combat inflation and the pound fell to 21-month lows against the dollar. GBP/USD found support at 1.8650 before falling to near our updated forecast support on Friday with its week low of 1.8510. Sterling closed the week at 1.8662.

Calendar and Outlook August 18th to 22nd    
Here are the highlights of this week’s economic calendar (chart 3). For an extensive list of the week’s economic releases and events see our economic calendar.

Keep an eye on US housing data on Tuesday with Building Permits and Housing Starts and Tuesday’s Producer Price Index will help you keep tabs on US inflation. Watch Thursday’s Philadelphia manufacturing numbers for signs of continuing improvement.
Tuesday’s ZEW numbers are a useful guide to the European business climate, while Thursday will bring a comprehensive snapshot of European economic activity with French, German and euro-zone Purchasing Manager Numbers. Readings over 50 signal expansion and numbers below, contraction. 
UK housing is surveyed Sunday night. Wednesday’s Monetary Policy Committee meeting minutes will give us the story behind the Bank of England’s decision to hold rates on August 7th. Look out for UK Retail Sales on Thursday and UK GDP on Friday.

Forecast August 18th to 22nd 
The US dollar continues to strengthen as European data fails to impress and crude oil prices continue to drop.
We see EUR/USD finding support at 1.4440 and resistance at 1.48.
GBP/USD blew through all support last week. In the Colt FX Live Trading session, one of the participants noted that the pair had broken a head and shoulders neckline on the weekly charts and set a target of 1600 pip decline to 1.73. We’ll have to see how that pans out over the next few weeks. However, this week we see GBP/USD encountering support at 1.8510 and resistance at 1.90.
USD/JPY should find support at 109.50 and resistance at 113.30.

Chart 3 Calendar Highlights

Our full economic calendar is available.

The latest Forex Focus video.