Euro Heading Towards All-Time Highs (page 1 of 2)

Dollar Tracking Bond Yields Lower: Looks Like Market May Be Expecting Weak Data

Traders were out to sell the US dollar today and nothing could stand in their way. Stronger than expected manufacturing sector growth only helped the dollar rally a mere 15 pips against the Japanese Yen, and even those gains were lost shortly afterwards.

The move in the US dollar indicates that the foreign exchange market is focusing almost exclusively on bond yields today. Ten year yields are back below five per cent, which is the lowest that yields have fallen to in three weeks. The drop in yields is indicative of risk aversion, profit taking ahead of the US Independence holiday and concern that the remainder of the US data due for release this week will be dollar negative.

The heightened threat of terrorism in the UK and the US has caused a rise in risk aversion that can not only be seen in currency prices, but also gold prices. This week, there is a decent chance that we will begin to see softer US data. Even though manufacturing ISM increased from 55 to 56, the prices paid and employment components of the report both deteriorated in June.

Factory orders and pending home sales are due for release tomorrow. Having seen durable goods, new and existing home sales, chances are definitely in favor of weaker numbers.

Although the dollar could fall further on the disappointments, don't expect a full fledged collapse (120 will most likely hold in USD/JPY while 1.37 should still be resistance in the EUR/USD) because the strong rally in US stocks and continual rise in oil prices will keep inflationary pressures a problem for the Federal Reserve even if the US economic outlook worsens.

Euro Heading Towards All-Time Highs

After breaking out to the upside on Friday, the Euro ended the US trading session approximately 50 pips away from its all-time high.

Of the many countries or regions that released manufacturing PMI reports on Monday, the Eurozone and Switzerland were the only ones to report stronger rather than softer growth. The acceleration in activity came predominately from Germany where growth has benefited from the drop in the Euro.

Between the beginning of May and the middle of June, the EUR/USD fell from 1.3685 down to 1.3264. The breakout in the EUR/USD is also reflective of the market's expectations for Thursday's interest rate decision. Stronger growth and inflationary pressures suggest that the ECB could be more hawkish this week but at the same time they may want to wait until after the summer holiday season in Europe to change the degree of their bias.

Contrary to popular belief, the interest rate curve is only pricing in a slim chance for a 25bp rate hike by the end of the year.

Meanwhile the Swiss Franc has also performed extremely well over the past 24 hours. The combination of rising risk aversion as well as a sharp jump in the Swiss PMI index sent the Swiss franc to a 16 year high against the Japanese Yen. Consumer prices are due for release tomorrow. Should inflation also accelerate more than expected, then Switzerland would be a shoe-in for rate hike come September.

British Pound Hits 26 Year High

In contrast to the US dollar, traders were committed to buying the British pound today and nothing could stand in their way.

Despite news that a burning car hit an airport terminal in Glasgow, Scotland this weekend and manufacturing conditions deteriorated in the UK, the British pound hit a 26 year high today.