FX roundup: Dollar strengthens against basket

Hussein Sayed, Financial Analyst, ACM Middle East & Asia

The dollar strengthened the most against the Euro (EUR) and Swiss Franc (CHF), but dropped against the Canadian (CAD) as crude oil prices managed to stay around the $70 levels.

The US economic calendar is light next week, with the exception of Monday when the ISM Non-Manufacturing Index will be released shedding more light on the state of the domestic service industry, which accounts for almost 75% of US GDP.

It would be hard to predict whether the reversal in the US dollar is sustainable as many factors could weigh in on the currency.

World Bank President Zoellick, and other policy makers from China and Russia are all insisting that the US should not take for granted the dollar's status as the world's main reserve currency; on the home front, the Fed is unlikely to tighten its monetary policy unless unemployment levels come down, meaning that interest rates will remain low for a long period.

Focus for next week will be on central banks meetings, as BoE, RBA, and ECB are all going to announce their interest rate decisions.

Euro losses

The Euro (EUR) was among the biggest losers against the USD dropping 0.7% last week, and breaking below the 1.45 support level to bottom at 1.4480 on Friday as risk aversion got a boost after US employment data fell more than expected.

The pair then found support as PIMCO's Bill said that the Fed will not move to tighten unless unemployment is down for 12 months in a row, and was convinced that the US wants a weaker currency. Meanwhile, positive figures from Euro Zone PPI raised speculation that the ECB is going to raise rates before the Fed does. The EUR/USD later reversed to close at 1.4541.

The ECB is widely anticipated to keep interest rates at 1% on Thursday, but it will be interesting to see whether ECB president Trichet will signal any rate hike soon. The Eurozone economic calendar will be busy next week, when the focus will be on the releases of Eurozone PMI, Retails Sales, and final GDP for Q2. The Euro is still in a danger zone, and support is seen in the 1.44 - 1.45 area, where a break below could turn to be bearish for the Euro.

Sterling strengthened by house prices

Meanwhile, the British Pound (GBP) had a good performance last week, closing almost unchanged against the dollar at 1.5943, and losing only against the CAD.

Perhaps the good fundamental reports from the UK economy helped the pound as nationwide house prices posted an increase of 0.9% and UK PMI service sector was able to remain above 50, indicating an expansion in activity.

The main event to watch out for next week is the Bank of England's (BoE) interest rate decision on Thursday. All analysts agree that interest rates will remain unchanged at 0.5% but focus will turn on the BoE's policy statement on whether they will keep the £175bn QE programme unchanged or not. Any sign of expanding the programme would weigh heavily on the currency. On the data front, focus will be on UK PMI services, Industrial Production, Manufacturing Production, Consumer Confidence, and Trade Balance.

Finally, the Aussie (AUD) had the best performance in the beginning of the week, posting a new 2009 high against the USD at 0.8858. The AUD/USD pair then started falling on Thursday as risk aversion gained closing at 0.8646 on Friday. The RBA will be meeting on Tuesday and it is widely anticipated that the central bank will leave interest rates unchanged at 3%.

As with the ECB, and BoE, focus will turn on Governor Steven's statement - last meeting he was optimistic about the economy and his statement was hawkish compared to other governors, if we see a continuation in his optimistic outlook this would likely be positive for the Aussie. On the data front, focus will be on Trade Balance and Employment Change.