At the start of the week, the US dollar initially found support after US President Barack Obama announced that America’s most wanted terrorist, Osama Bin Laden, had been killed by US forces in Pakistan.
The initial gains that stemmed from geopolitical events from Pakistan were squandered by the greenback in early European trading on Monday, as stronger PMI data from the euro bloc pushed the single currency to a fresh peak above 1.4900 against the US dollar.
The dollar did regain its footing later on Monday and early on Tuesday as risk sentiment soured. The recovery by the dollar was being attributed to the fact that forex traders responded positively to the news of Bin Laden’s death as they anticipate a reduction in military spending. A significant drop in precious metals, especially silver (XAG/USD), which fell more than nine per cent from its close on Friday, also favoured the greenback.
Market holidays in the UK and Japan earlier in the week, and the reluctance of forex investors to take on fresh bets ahead of interest rate decisions by the Bank of England and the European Central Bank later today also contributed to price action.
Despite recent events, we still expect movements on the forex market to be driven by interest rate expectations in the medium term. Although the ECB is expected to keep its benchmark rate at 1.25 per cent today, last Friday’s data showed inflation accelerated to 2.8 per cent annually in April, well above the ECB’s two per cent target, and reinforced expectations for further rate hikes in summer.
The Swiss franc is also expected to continue to surge higher versus the greenback, after stalling briefly on Tuesday. The swissie extended its record high versus the buck three consecutive times from Friday to Tuesday, after Swiss National Bank Chairman Philipp Hildebrand said on Friday that inflationary pressures are starting to emerge due to higher energy prices, increasing rate hike expectations and driving the franc higher. The USD/CHF had dropped to an all‐time low of 0.8620 by the time of writing.
An FOMC statement and Fed chairman Ben Bernanke’s subsequent press conference last week put the greenback further on the losing end when it comes to interest rate differentials. The Fed acknowledged recent weakness and adjusted lower their 2011 GDP forecast, but did however, revise higher their 2011 inflation predictions.
The statement was very similar to March’s statement, keeping the key “exceptionally lower for an extended period” language, but crucially, committed to continuing QE2 until June.
The diverging outlook between central banks will continue to drive speculation on the forex markets and at the moment, only renewed eurozone debt concerns may alter this situation. Regarding the eurozone periphery, Eurogroup president Jaen Claude Juncker told Portugal that they will have a full response by midMay and reiterated that Greek debt restructuring was not an option at this point.
Greek Finance Minister George Papaconstantinou has continually repeated that Greece didn’t need to restructure its debt but an extension to the repayment schedule might be helpful.
The dollar is down by an average of 5.40 per cent so far this year against its major counterparties. The greenback has slipped more than nine per cent versus the single currency and almost eight per cent against the swissie by the time of writing.
Sterling is down across the board so far this week. It slipped to its lowest level since March 2010 versus the euro and fell almost one per cent against the greenback on Tuesday after data showed the pace of growth in the manufacturing sector slowed down in April. The data dampened expectations for a rate hike by the BoE in the near term and widened divergence between UK and euro zone monetary policy outlook.
The euro rose to a high of 89.86 versus the pound by the time of writing, its highest since the end of March 2010. Cable (the exchange rate between sterling and the US dollar) was also down versus the buck, dropping more than 1.30 percent on the week by the time of writing.
RTFX TraderTip warned of an ‘imminent end of bullish move’ in its weekly scenario for GBP/USD. The scenario also suggested a correction down to below 1.6507 for the week. In EUR/GBP’s weekly scenario, TraderTip suggested that after a fall to 0.8803, the pair should recover to around 0.8902. The monthly scenario for EUR/GBP predicts a pull back from the 0.8902 – 0.8964 area, but warns that a premature rise above this level could see it rising above 0.9062.
Upcoming FX key events:
Today: ECB and BoE Interest Rate Decision, UK BoE Asset Purchase Target and German factory orders.
Tomorrow: US Payrolls data, Canadian Unemployment, UK PPI and German Industrial Production.
FX technical key points:
EUR/USD is bullish, target 1.5144, key reversal point 1.4150.
EUR/GBP is bullish, target 0.9150, key reversal point 0.8700.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6877, key reversal point 1.6168.
USD/CHF is bearish, target 0.8500, key reversal point 0.9400.
AUD/USD is bullish, target 1.1431, key reversal point 0.9550.
NZD/USD is bullish, target 0.8212, key reversal point 0.6950.
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Mr Xuereb is a trader at RTFX Ltd.