NEWS / Foreign Exchange

Time for a dollar positive correction?

The EUR/USD pair set new records yesterday morning, as the pair reached the 1.4430 zone in Asian trading. There wasn??™t any fresh news to guide this move; it was more a continuation of bearish dollar sentiment. Throughout the day this new record could not be matched again.

The market entered a bit of a questioning phase, thinking about what the Fed could do on Wednesday. The Fed rate cut of 25 basis points was already well incorporated and last week even some speculated on a 50 basis points rate cut! Such ideas were wound down as an FT article focused on suggestions that some Fed members were less inclined to a rate cut.

This permitted the dollar to make a bit of a comeback. The EUR/USD pair dipped to day lows at the 1.4380 zone, but just as often occurred over the past weeks, such dips merely attracted new dollar sellers and EUR/USD re-found footing around 1.44 afterwards.

Still, we now expect a bit of cooling down period, with the market already completely dug in ahead of the FOMC decision and mainly the statement afterwards.This could give some more range trading and we are even inclined to see some profit taking attempts over the next days. The Fed rumour has been incorporated by selling the dollar, maybe its time to buy back the dollar on the news.

The data later this week will be guiding for direction further out with the US ISM and the Payrolls.

Today, the market can take another look at the housing market situation with the S&P/Case-Schiller composite house prices and there is also the consumer confidence, which will attract attention as the final Michigan consumer confidence further dipped.

USD/JPY rose yesterday on the back of the FT article suggesting that some Fed members were somewhat more hesitant on rate cuts. The FT said that ???according to anecdotal reports, there is some resistance among fed insiders to the notion of a guaranteed rate cut???.

This report gave some help to the troubled dollar and pushed USD/JPY up from the 114.20 zone to the 114.80 area.

Later on though, things cooled down again and the pair slipped back to the 114.60 zone and now the 114.50 area. This morning, Japanese household spending jumped 3.2% Y/Y, compared to expectations for a rise of 1.4% Y/Y, but this seems to have only a small yen positive impact, as at the same time the unemployment rate ticked higher.

USD/JPY is moving in a broad sideways range between 117.95 and 111.60. We would advise to play those ranges. The ST outlook is a bit mixed:

We feel equities may have some downside already having been supported by the Fed rate cut prospect, but will receive no additional fuel. This would be slightly yen positive??¦

However, we feel there is also a case for a dollar rebound, as the Fed will not preannounce additional rate cuts. The Fed also doesn??™t want to cause a unidirectional dollar sell-off or panic feeling on the Greenback as this would be counter-productive.

EUR/GBP tri    ed to tick up recently, but was struck back yesterday from the 0.7010 zone to the 0.6990 area.

BoE??™s Barker yesterday was reported to have questioned whether things have changed so much since August that the bank of England should cut rates. We feel she has already indicated this view recently, but this may help to support the sterling.

As the pair also seems capped by the recent highs at the 0.7028 zone now, this leaves open the option for some more sterling positive correction. The pair is still in a broad sideways mode between the 0.7028 and the 0.6894 zone.