Dollar trending lower following G-20 meeting

Talking Points

  • Japanese yen: Reaches fresh 15-year high against the buck
  • British pound: BBA mortgage approvals falls to 18-month low
  • Euro: Industrial new orders top expectations in August
  • U.S. dollar: Tumbles against all major currencies post G-20 meeting

After testing the 20-day SMA, the EUR/USD has since then reversed course and now looks poised to extend its advance towards 1.4100 in the near term as the U.S. dollar continues to remain under pressure post the G-20 meeting in South Korea this past weekend. The group of finance chiefs pledged to avoid weakening their currencies in order to boost their exports. Indeed, the greenback continued its southern journey during Monday’s trade as the meeting omitted any U.S. undertakings regarding further QE measures. Going forward, market participants will shift their focus to the FOMC rate decision which is expected to be released on November 3. As of late, traders are pricing in a zero percent chance that the Fed will hike borrowing costs 25 basis points, according to the Credit Suisse overnight index swaps.

Taking a look at the economic docket overnight, Eurozone industrial new orders topped economists’ expectations as figures rose 5.3% in August after falling a revised 1.8% the previous month, while the annualized rate soared 24.4%. The breakdown of the report showed that capital goods lead the advance, climbing 8.1%, and was followed by a 5.4% gain in durable consumer goods. Indeed, today’s report marks the largest increase since March of this year, and was one of the main reasons for the euro’s gain against the U.S. dollar overnight. Though the data bodes well for the 16 member euro area, the single currency is expected to come under pressure in the beginning months of 2011 as governments within the bloc implement tough austerity measures in order to battle their high budget debts. Until then, it is likely that traders may witness the EUR/USD test 1.4100, with a break above this level exposing 1.4200 as technical indicators on the weekly chart point to further gains. Across the news wire overnight, ECB’s Tumpel-Gugerell said that the recovery in the Eurozone is “still on track,” and added that policy is “still appropriate.”

The British pound continues to find support at the 50-day SMA, and until a break and close below this level is apparent, the GBP/USD will continue its northern journey. During the overnight session, the British Bankers Association released the loans for house purchases report which showed that figures topped expectations in September but slowed from the previous month prior and marked the lowest level since March 2009. With the demand for homes likely to scale back further in the upcoming months amid the violent spending cuts in the U.K. Paired with uncertainty in growth prospects, the British pound will begin to lose ground against the dollar, and may decline further against the euro. Thus, the Bank of England is likely to refrain from raising its key overnight lending rate until at least the second quarter of next year. At the same time, with uncertainty concerning economic prospects gathering pace, the split amongst the MPC will also widen in the near term.

The greenback is down against all major currencies and may continue its southern journey as traders await the FOMC minutes next week. The economic docket is fairly light today; however disappointing releases could fuel further speculation of quantitative easing by the Fed. On tap are the existing home sales, Dallas Federal Manufacturing activity report and the Chicago Federal National activity index.

CHART 1

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