Bearish U.S. dollar sentiment carries into Oct.

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.

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