At the start of the week, the euro jumped higher, hitting a fresh monthly high versus the US dollar. The single currency gained momentum after euro zone finance ministers authorised the release of Europe’s share of Greece’s next tranche of financial aid over the weekend. It was supported for most of the past week as the Greek Parliament passed an austerity vote and European Central Bank president Jean Claude Trichet reiterated that the central bank policy makers are in “strong vigilance” mode, bringing interest rate expectations back into the limelight.
The euro ended the week more than three per cent higher versus the dollar after five consecutive days of gains. EUR/USD peaked at 1.4578 very early on Monday morning lifted by the news of the release of Greece’s fifth quarterly installment payment. But the euro gave up its gains on Monday after Standard & Poor’s warned that if put into practice, the draft plan proposed by French banks for a Greek debt rollover might cause Greece’s rating to be cut to “selective default”.
On Tuesday, at the time of writing the US dollar staged a comeback of its own. The dollar was lifted by a short squeeze and a series of stop-loss buying. The greenback also benefitted from a drop in risk sentiment on Tuesday on concerns over the Chinese economy and speculation that US companies would repatriate earnings from overseas.
Moody’s waived the flag on China’s growth outlook saying the scale of problem loans in China may be far larger than most predicted, raising concerns over the Chinese banking sector. This report weighed on risk appetite, supporting the US dollar.
The other factor lifting the dollar was speculation that another US Homeland Investment Act was under development. The first initiative of this kind, in 2004, had given a strong boost to the greenback. The greenback was up half a percent versus the single currency at the time of writing. However, gains for the dollar were seen limited especially as concerns over the United States’ fiscal conditions escalate and ahead of an ECB interest rate decision scheduled for today.
Forex investor’s expect the single currency to continue to benefit from interest rate differentials in the short-term, especially if the ECB raises its rates today at 13:45 CET and more importantly, if Mr Trichet signals further rate hikes to come. Support for the EUR/USD pair was being seen at the 55-day and 20-day moving averages by 1.4414 and 1.4381 respectively, and in the event the ECB hints at more tightening, we could see the pair retesting June highs at 1.4696.
RTFX TraderTip for the pair predicts it should trade higher to 1.4686 by the end of the week while 1.4394 or 1.4316 hold. The monthly scenario suggests the pair should test 1.4733 before selling off.
The Australian dollar was the biggest loser at the start of the week, slumping more than 0.75 per cent versus the dollar. The Aussie was hurt initially following downbeat retail sales and construction data, published Monday. It remained under pressure on Tuesday, after the Reserve Bank of Australia kept interest rates unchanged at 4.75 per cent while expressing less enthusiasm over growth forecast for this year. Talk of an imminent interest rate hike in China was also piling the pressure on the Aussie.
AUD/USD fell from a one-month high hit on Friday at 1.0791, and had dipped to 1.0664 by the time of writing. The Aussie was also down 0.40 per cent against the euro, one per cent versus sterling and around 1.30 per cent versus the Swiss franc. Our forecast for the Aussie is still bullish however despite this week’s correction. RTFX Trend remains bullish on AUD/USD and bearish on GBP/AUD. RTFX
TraderTip for AUD/USD predicts that the pair should trade higher to 1.0918 by the end of the week as long as 1.0654 or 1.0586 offer support and the monthly scenario suggest the pair should test 1.1000.
Sterling got a boost on Tuesday after data showed the services sector recorded a surprise jump in June. A Purchasing Managers’ Survey showed services index rose to 53.9 from 53.8 in May, beating consensus for a fall to 53.5. Cable (the exchange rate between sterling and the US dollar) was lifted on short-covering but strength derived from the upbeat data was expected to fade as a breakdown of the figure showed that expansion in the services sector was still below trend, while job creation and confidence remained low.
The pound was up more than half a per cent versus the euro and 0.20 per cent against the greenback. The Bank of England is not expected to make any changes to its monetary policy today, but forex investors are becoming more and more accustomed to the idea that Britain may embark in a fresh round of quantitative easing, which would undoubtedly drive the pound lower.
Upcoming FX key events:
Today: EZ ECB Interest Rate Decision & News Conference, UK BoE Interest Rate Decision & Asset Purchases Target.
Tomorrow: US Non-Farm Payrolls, US Private Payrolls, US Unemployment Rate & Canadian Employment Change.
FX technical key points:
EUR/USD is bullish, target 1.4700, key reversal point 1.4250.
EUR/GBP is bullish, target 0.9150, key reversal point 0.8700.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8200, key reversal point 0.8850.
AUD/USD is bullish, target 1.1050, key reversal point 1.0450.
NZD/USD is bullish, target 0.8500, key reversal point 0.7840.
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Mr Xuereb is a trader at RTFX Ltd.