The US dollar fell to multi-month lows against major currencies earlier this week, stung by speculation that US interest rates will stay low, while technical factors kept the currency under selling pressure.
The US dollar index, a measure of its value against a basket of currencies, fell to 80.587, the weakest since mid-April and marking its first break since January below its 200-day moving average, a move that analysts said would open the door to more losses.
The US currency struggled after Federal Reserve chairman Ben Bernanke said on Monday that the economy has yet to recover fully and monetary policy must remain accommodative.
In a speech in South Carolina that was more sombre than his testimony to Congress last month, Mr Bernanke said: “We have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure and lost savings.”
Mr Bernanke continued by saying that the Fed must avoid raising interest rates too soon and urged the government to proceed cautiously in cutting spending and raising taxes. “We need to be careful about tightening too quickly,” Mr. Bernanke said, promising that monetary policy would remain loose until “sustained” growth is seen, especially in jobs.
Meanwhile, on Tuesday, a report surfaced in the Wall Street Journal about how the Fed will consider a shift in the management of their massive securities portfolio next week. The issue is whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead.
Following this report the euro increased to a six-month high against the US dollar, to 1.3262. The greenback also fell to 85.85 against the yen, the lowest since November 2009.
On the data front, all eyes are pointed toward today’s ECB and BoE meetings and tomorrow’s US Employment Report. Expectations call for another negative reading, this time to the tune of 60,000, on the headline Nonfarm Payrolls figure. Albeit, employment in the world’s largest consumer market apparently is moving in the right direction, even though at a snail’s pace.
The ECB and BoE are expected to leave monetary policy unchanged as inflation remains below target levels.
On the technical side, the EUR/USD is continuing to push higher, with prices taking out resistance at the 61.8 per cent Fibonacci retracement of the move from 1.3690 to 1.1875 at 1.2999. Price action will now look to challenge 1.3265, the 76.4 per cent retracement level. (See graph below).
The British pound rose to 1.5964 versus the US dollar, its highest since early February and just shy of 1.5970, the 61.8 per cent retracement of the move down from a high in August 2009 of 1.7044 to May’s low of 1.4225. The British pound hit a six-month high against a broadly weaker US dollar, boosted by growing expectations the UK economy will continue to recover following recent upbeat manufacturing sector data and robust bank earnings. The British pound is on the upside against most of its major rivals this week.
Upcoming FX Key events
Today: UK BoE Interest Rate Decision & Asset Purchases Target, EZ ECB Interest Rate Decision.
Tomorrow: US Unemployment Rate & Non-farm Payrolls.
FX Technical Key points
EUR/USD is Neutral.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bullish, target 94.00, key reversal point 87.00.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
Mr Muscat is senior trader at RTFX Ltd.
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