Forex report Apr. 23-30, 2007
The dollar started the week recovering from the previous week??™s lows against the European currencies and the yen. Overall sentiment was still dollar negative on gloomy prospects for the US economy in the near term and widening of rate differentials with the euro zone and UK. Inflation reports in the United Kingdom the week before drove the Sterling as high as 2.0133 against the dollar on expectations the BOE will increase the borrowing costs at its May meeting with 0.25%, or even 0.50% some economists have speculated.
Tuesday, April 24th, the dollar was approaching the all times low against the euro after a report showed a significant drop in new homes sales and consumer confidence index. Traders went short on the dollar on reinforced speculation of a FED rate cut in the first half of the year. Part of the downside surprise in Tuesday??™s news has already been priced in by the market since before. The dollar has fallen since the beginning of 2007 after the housing market in the US was reported as slowing down. New homes sales and building permits figures dropped in the last couple of months. The euro was above $1.36 level, with traders cautiously eyeing the all time high of $1.3666, which is a strong psychological level.
Wednesday morning a better than expected number is the Germany business confidence index pushed the euro higher on speculation of increasing interest rates in the euro zone in the months to come. Later in New York trading the dollar managed a recovery after US March durable goods orders came out better than the forecast. The greenback came very close to its all time low level against the euro, but the 1.3666 proved to be a strong resistance level.
Thursday the dollar rose significantly against the Sterling and modestly against other major currencies as traders were squaring positions ahead of Friday??™s first quarter GDP report. The British pound was as low as $1.9887. The euro traded around $1.3600 throughout the day. Investors were still favoring a weak dollar and expectations for the first quarter economic growth in the US was for a 1.8% reading.
Friday morning the euro reached an all time high against the Greenback, after a weaker than expected GDP figure boosted speculations for a FED rate cut. The European currencies are supported by rising rates prospects in the near future, both by the ECB and BOE. The ECB so far has expressed no problem with the notion of additional strength in the currency.
The euro was buying 1.3682 dollars moments after the release of the GDP reading. The Sterling was reached $1.9990. Before the New York session close, the dollar recovered modestly as investors were taking profits ahead of the weekend. The yen hit an all time low against the euro, and was trading at 119.60 against the dollar before the day closed.
The dollar touched psychological levels against the euro and Sterling this week and many investors are still betting on a weaker dollar. Although negative for the Greenback, current levels make US exports more attractive in comparison to those of the EU; an increase in US exports would help narrow the current trade deficit.
For the coming week we expected further dollar weakness, but a correction in very probable. Buy euro on dips toward $1.3500 with stops around $1.3460. The Sterling is also a candidate for a strong correction, but we expect the $1.9700 level to hold as medium term support.