Thursday, June 24, 2010

Currencies Round up:US dollar hit by Fed outlook, as rates likely to remain low

Date: Thursday 24 Jun 2010
Yesterday was a tale of two central banks with the Bank of England minutes surprising the market with the news that Andrew Sentance, one of the members of the monetary policy committee wanted to raise rates by 0.25%, on concerns about the current high inflation rate.

This caught the market by surprise and sent the pound to its highest levels since late January against a basket of currencies on fears that UK interest rates may have to rise this year.

In the US risk appetite took another blow after US new home sales for May plunged 33% to their lowest levels in over 40 years. Coming as it did, hot on the heels of existing homes sales the day before the markets came under further selling pressure, fuelling the likelihood that this potential double-dip in housing could transmit itself into the wider economy.

If the market was hoping for re-assurance from the FOMC they would soon be disappointed as the Federal Reserve signalled that growth was likely to disappoint over the course of the next 12 months, due in no small part from the problems in Europe.

Against this background it was no surprise that they stuck to the same low rate mantra that has been in place since March 2009. It was also no surprise that Thomas Hoenig was the lone dissenter to the lower rates language for the fourth straight meeting, but with inflation virtually non-existent there was never much likelihood of any change.

Given the poor data over the past few days the markets will be hoping for an improvement in today’s weekly jobless after last weeks figure surprised to the upside. Expectations are for a figure of 460k, but it will be the durable goods orders for May that may well be of most interest, with an expectation of a decline of 1.2%.

On a separate note the Australian dollar was given a brief boost as Australian Prime Minister Kevin Rudd was ousted by his deputy Julia Gillard after disagreement within the government over the proposed implementation of the 40% mining/resource super tax. However, these gains could well be short-lived as the Aussie is usually one of the gainers when risk appetite is strong. Given that risk appetite is currently looking a little shaky, traders could use this rally as a selling opportunity.
EURUSD – the single currency continues to find upside difficult and continues to be susceptible to sharp pull backs in spite of briefly breaking below the 1.2250/60 level yesterday afternoon. The low at 1.2210 prompted a quick turn around late in the afternoon after the FOMC announcement, back above 1.2300. However this sharp pull back is likely to be temporary, and looks likely to be a precursor to a test back towards the 1.2135/45 level which remains a pivotal level in the near term.
The key day reversal posted this week as well as the failure to get above 1.2500 has sown doubts about whether the recent rally of the last few days may have come to an end. The long term outlook remains for a weaker Euro and a test towards the 2005 lows, around 1.1650.
GBPUSD – the revelation of a split in the MPC committee saw the pound rally strongly yesterday breaking above 1.4925/30, and now looks set to target the 1.5030/50 area. A break above here could then target 1.5250.
This resistance equates to the highs of the 10th and 12th May. The 1.5030 level is also 61.8% retracement of the down move from the April highs at 1.5525 to the May lows at 1.4230.
The key support level remains around 1.4680/90, and is the key barrier to further declines towards 1.4500 and the trend line support around 1.4450.
The key support level remains down at 1.4230/50.
EURGBP – the strength of the pound continues to take its toll on the single currency but it was only able to make a marginal new low at 0.8202, still short of the all important 0.8170 50% Fibonacci area, which remains the primary objective. Resistance can be found around the 0.8320/30 area and behind that at the key resistance above 0.8400.
USDJPY – the recent paring back in risk appetite continues to weigh on the dollar here with the result that we broke below the recent range lows around 90.20 and now look set to test towards 89.30.
The lows so far have been 89.75/80 but it seems only a matter of time before we see a return towards 89.30.
The US dollar now needs to get back above 90.20/30 area to re-target the longer 90.70 and return to the 91.20 longer term pivot.

No comments: