Weekly FX roundup: Euro strength continues

Hussein Sayed, Financial Analyst, ACM Middle East & Asia

However, the rally in the equity markets came to a halt on Friday due to profit taking, pulling back major indices, and giving some support to the US currency.

Last week, the Dow Jones fell 0.2% closing slightly below the 10,000 level at 9,972, while the S&P and Nasdaq indices declined 0.8% and 0.1%, respectively.

There were a few economic releases from the US last week.

Housing showed a slight improvement, rising 0.5% in September due to the $8,000 tax credit given for the first time to homebuyers, while jobless claims rose to 531,000, which could indicate that nonfarm payrolls would possibly post another heavy decline in October.

The Dollar has dropped tremendously since the beginning of 2009, especially against commodity and emerging markets currencies, and expectations are that it would continue to fall against major currencies. The Brazilian real appreciated 35% against the dollar, while the Aussie and Loonie rose 32% and 16%, respectively.

Last week we witnessed some interventions from several currencies to curb their appreciation against the dollar - the Brazilian government announced the introduction of a 2% tax on foreign equity purchases (excluding foreign direct investment), while the Bank of Canada sent back the USD/CAD to 1.05 levels after trading close to 1.02 a week earlier.

This indicates that serious actions are being taken to support the falling dollar; but the question remains, 'Are we going to see a similar action from the US government itself or from major central banks such as the ECB?'

Key US data and events to watch next week include the Case Shiller home prices and consumer confidence on Tuesday as well as durable goods and new home sales on Wedneday, while the main focus on Thursday will be on Q3 GDP data. Friday will be busy with the releases of personal income and spending data, as well as Chicago PMI and consumer confidence index.

Euro breaks resistance barrier

On Wednesday, the Euro broke above the 1.5 psychological resistance level against the dollar for the first time since August 2008, and also managed to close above this level.

Although Euro Zone Finance Ministers and ECB president Jean Claude Trichet in their meeting last week did their best to stop the Euro's appreciation, traders paid no attention. The Euro's strength was supported by positive European economic data with German IFO business confidence and Euro Zone purchasing manager index releases rising above expectations.

The Eurozone data releases to watch out for include the German consumer confidence index on Monday, followed by the French version on Tuesday. The German CPI is also out on Wednesday, while the Eurozone consumer confidence business and climate indicators are out on Thursday. On Friday traders will be awaiting the Eurozone CPI and German Retail Sales data announcements.

Sterling loses momentum

After rising for almost eight days, the sterling had a strong bearish movement on Friday erasing the profits achieved this week.

The Sterling's bullish movement started with the comments from BoE deputy governor Paul Fisher, who said that the BoE will pause the asset purchase programme in November's meeting. BoE's minutes reflected Fisher's remarks revealing no intention of extending the asset purchase programme, thus boosting the Sterling towards the 1.66 levels.

The big shock came last Friday when the preliminary Q3 GDP data for the UK showed a 0.4% contraction in the economy compared to the previous results. The reaction was harsh on the pound, sending it 387 pips down after posting its high at 1.6691 to close at 1.6304. There could be more downside in the GBP/USD pair as long the economy is fragile.

UK economic data releases next week start with the CBI distributive trades on Tuesday. Consumer credit and mortgage approvals are out on Thursday, while consumer confidence is due on Friday.