The US dollar was on the back foot at the end of last week, before a two-day Federal Reserve FOMC meeting which came to a conclusion earlier this week. The greenback fell to a one-month low against the Japanese yen and five-week trough versus the euro, as forex investors trimmed their exposure to the dollar amid uncertainty over future Fed policy.
A media report last week said the central bank may tweak its forward guidance message to reiterate that interest rates will remain low for an extended period. The dollar was supported for most of the second quarter of this year, as improving economic conditions in the world’s largest economy ignited talk that policymakers will start scaling back on a record quantitative easing programme sooner than expected. However, calls by Fed Chairman Ben Bernanke that accommodative monetary policy was still necess-ary for the economy have weighed on the buck in recent weeks, as it retreated against a basket of major currencies.
Amid speculation that the Fed will continue to pledge lower rates and go ahead with its record $85-billion-a-month QE programme, traders remained wary about selling the greenback aggressively as policymakers were still seen tapering the stimulus programme in the coming months, and the dollar halted its slide on Tuesday.
EUR/USD rose to a five-week high by 1.3297 on Friday, but failed to extend its gains higher at the start of the week and stalled by 1.3294. USD/JPY fell to 97.64 on Monday, but bounced back after hitting key support represented by the 50 per cent Fibonacci retracement of the June to July move at 97.68. This level is also characterised by an area of heavy congestion in the latter part of June which is acting as support.
Any dovish comments by the Fed may give scope for the dollar to break through support and extend its five-week low, now by 81.499, against its major peers. The EUR/USD may likely break above its 1.3300 barrier while USD/JPY may drop aggressively below 97.50. However, analysts warn that dollar weakness may be short-lived, especially if economic data continue to show improvement, and recommendations were to buy back the buck on pullbacks.
At the end of this week, the jobs report from the United States will be vital for the fate of the greenback in the near-term. US employers are expected to have added fewer jobs than the previous month in July, the change in non-farm payroll report will probably show on Friday, but the jobless rate is forecast to have fallen to 7.5 per cent from 7.6 per cent. Given the Fed has tied any decisions on scaling back of its stimulus programme to the improvement in underlying economic conditions, especially the labour market, any positive surprises may reignite dollar bulls and send the greenback surging.
Apart from the FOMC meeting and the labour market report from the US, the European Central Bank and Bank of England also hold policy meetings this week. Both the ECB and the BoE are expected to maintain their pledges to keep monetary policy loose, but investors will be increasingly anxious about the outcome from Britain as Mark Carney completes his first full month as governor of the second-oldest central bank in the world (the oldest central bank is Sweden’s Riksbank).
EUR/GBP surged on Tuesday to 0.8682 and approached its two-week high by 0.8711, before the key central bank meetings. The Japanese yen slipped from its strongest level in two weeks against the euro and from a one-month high against the dollar. The yen was weighed by downbeat industrial production data from Japan, which gave the Bank of Japan scope to continue on its path of expanding stimulus and dampened demand for safe-haven assets.
Earlier in the week on Monday, the yen was supported by expect-ations of sluggish data out of China which also took a toll on equity markets. But the Nikkei and other equity indices in the region wobbled back as the yen weakened.
The Aussie declined on Tuesday, after staging a mild comeback at the end of last week and early this week. The Aussie dollar was weighed by comments from Reserve Bank of Australia Governor Glenn Stevens who said the inflation outlook leaves scope for more interest rate cuts if needed. AUD/USD dropped to 0.9052, close to its lowest in almost three years by 0.8999.
Upcoming FX key events:
Today: EZ PMI, EZ ECB interest rate decision and news conference, UK BoE interest rate decision and asset purchases target.
Tomorrow: US change in non-farm payrolls, US unemployment rate and US PCE.
Technical key points: EUR/USD is bearish, target 1.2800, key reversal point 1.3450. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is bearish, target 1.4670, key reversal point 1.5500. USD/CHF is bullish, target 0.9900, key reversal point 0.9100. AUD/USD is bearish, target 0.8760 key reversal point 0.9520. NZD/USD is neutral.
RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.
Emman Xuereb is a trader at RTFX Ltd.