NEWS / Foreign Exchange

Can the dollar still fight back?

The EUR/USD pair was calm until the US releases came out. The pair was more or less stable, as we had anticipated, at the 1.44 zone until then, but the US data once more showed the dire straits the US is heading into.

Indeed, the S&P / Case-Schiller housing price release showed the hefty declines were continuing, demonstrating the pain in the housing market is very real and could hit the consumer the engine of US growth more severely.

Then the US consumer confidence, instead of just dipping, crashed from 99.8 to 95.6. (expectations called for a 99.0 reading??¦)

This took away the fragile dollar support and the EUR/USD pair reached up to near the record highs again at the1.4430 zone.

A break came only this morning as the pair reached the 1.4460 zone.

This fresh record doesn??™t make us doubt our new proposition voiced yesterday morning: we feel this was only a minor new high, with potential of some profit taking. We also feel the USD is in for a ST corrective phase. The currency is way oversold and the news of the Fed rate cut, probably combined with a not so dovish statement as some hope, will give fuel to a ST comeback story against the likes of EUR, AUD, NZD, CAD etc. we feel.

This evening we will see how this scenario pans out in reality with the FOMC statement issued at 19.15 (an hour earlier than usual due to EU??™s daylight savings time change last weekend). The market will then start looking ahead to the US ISM on Thursday and the payrolls on Friday. These will be guiding going forward for dollar sentiment.

This afternoon, the dollar can also get some guidance intraday from the US ADP employment numbers (pointer for payrolls) and the GDP release.

USD/JPY ticked up yesterday morning on the story that the Fed could still hold rates at this meeting or not sound so dovish. USD/JY ticked up to the 114.80 zone, but slipped to the 114.70 area towards the close, as the poor US data (see EUR/USD part) couldn??™t push the dollar up more.

Looking at the longer term, USD/JPY appears to be moving in a broad sideways range between 117.95 and 111.60.

The ST outlook is a bit mixed. Indeed, the ST outlook for this pair is difficult to assess. The dollar looks to able to see some short covering in general, but whether this will be enough to prop it up against the yen is something different we feel, as the equities could also be in for a correction lower and this would be a mild yen positive, so the overall picture for USD/JPY is less obvious. Sideways trading looks to be preferred then, between the recent high at 115.03 and the recent low at 113.25 for instance.

The Bank of Japan this morning kept rates unchanged (8-1 vote with Mizuno as dissenter). What??™s more important is that the BoJ downgraded both growth and CPI in its table of forecasts. GDP growth was downgraded from 2.1% to 1.8% for FY 07/08 and core CPI was downgraded from +0.1% to flat for FY 07/08 and from +0.5 to + 0.4% for FY 08/09. This seems to indicate the Bank has more time to keep its rates low, as it says itself it will adjust rates on the basis of economic and price conditions??¦ This is of course no help to the yen.

EUR/GBP inched lower early in yesterday??™s session, from the 0.6890 zone to the 0.6975 area. The rest of the day was sideways.

This morning, the nationwide house price index came out higher than expected (at +1.1% M/M and 9.7% Y/Y). This is seen as helping the sterling.

Going forward, 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.

This morning, the market will be looking closer at the EMU confidence indicators and the CPI flash estimate, but normally these aren??™t huge market movers.