Dollar mixed on thin trading, euro holds tight range

Talking Points

  • Japanese Yen: Mixed Against Majors
  • Pound: U.K. Banks Raise Borrowing Costs
  • Euro: Holds Narrow Range For Third Day
  • U.S. Dollar: ECB Trichet, Fed’s Yellen on Tap

The Euro fell back from a high of 1.4006 during the overnight trade to maintain the narrow range from the end of the previous week, and the exchange rate may hold steady throughout the day as the economic docket remains fairly light for Monday. The EUR/USD was unphased by the comments from the European Central Bank as price action held within a 90-pip range, but the speech by central bank President Jean-Claude Trichet scheduled for 16:00 GMT could spark increased volatility in the exchange rate as investors weigh the outlook for future policy. ECB board member Guy Quaden said the Governing Council may decide to normalize monetary policy further in the first quarter of 2011 as he expects the region to grow at a “slower, more moderate pace,” and went onto say that current policy remains “appropriate” during an interview with Bloomberg News.

At the same time, Governing Council member Lorenzo Bini Smaghi held a hawkish tone during an interview with Market News International and said “some inflationary pressures” are becoming apparent, led by higher energy costs, and the central bank may look to reestablish its exit strategy going into the following year as they maintain their one and only mandate to ensure price stability. ECB President Trichet may talk up the likelihood for a rate hike in the beginning of 2011 as the outlook for growth and inflation improves, and hawkish comments from the central bank head could drive the EUR/USD higher going into the end of the year as market participants speculate the Federal Reserve to increase quantitative easing at its next rate decision in November. However, as the recent rally in the euro-dollar remains overbought, with the daily relative strength index holding at 77, a corrective retracement may unfold in the days ahead, which could lead the pair to test 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, for near-term support.

The British pound bounced back from a low of 1.5913 during the European trade, with price action holding above the 10-Day moving average at 1.5850, and the GBP/USD may continue to trend higher over the near-term as it maintains the rally carried over from the previous month. As a result, the pound-dollar may make another run at 1.6000 later today as it retraces the overnight decline, but a shift in market sentiment could push the exchange rate lower as the U.S. dollar appears to be regaining its footing against its major counterparts. Meanwhile, a report by the Bank of England showed commercial lenders in the U.K. raised the cost of two-year fixed mortgage rates with a 25% deposit in September to 3.79% from 3.74% in the previous month, and the central bank is likely to maintain a dovish outlook for future policy as household and businesses continue to face tightening credit conditions. The BoE minutes, due out later this month, is likely to show the majority of the MPC vote to maintain its current policy in October, but a three-way split within the central bank could trigger a selloff in the British Pound as investors speculate the board to expand QE in the coming months.

U.S. dollar price action was slightly mixed overnight, with the USD/JPY slipping to a low of 81.71, and the greenback could face choppy price action throughout Monday’s trade as the U.S. bond market remains closed in observance for Columbus Day. With no scheduled event risks, risk trends are likely to dictate price action as the equities market are set to open their doors, but there could be a shift in market sentiment as members of the Fed are scheduled to speak throughout the day.

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