Weekly FX roundup: Dollar rallies

By Hussein Sayed, Financial Analyst, ACM Middle East & Asia

The US Dollar rallied against most of its major counter parts except the pound and yen, sending the Dollar Index to 76.2, as risk aversion began with the unexpected fall in US consumer confidence and new home sales at the onset of October. On a positive note, durable goods orders rose by 1% in October and the Chicago PMI rose to 54.2.

The big surprise came last Thursday from US GDP Q3 data which gained 3.5%, slightly ahead the expected 3.2%. Markets rallied on the release, but further dissection of the GDP data provided little confidence as almost half of the pickup in the GDP growth came from motor vehicle output, thanks to the cash for clunkers programme.

The week ahead is going to be busy and should give us a clearer indication as to where the US dollar will be heading in the midterm. The FMOC will be meeting on Wednesday, and there's so much speculation in the market that the Fed will be changing their tone into a more hawkish one. Any indication of raising interest rates early next year could boost the US currency.

Meanwhile, the godfather of economic indicators - the 'nonfarm payrolls' - is due on Friday. The market is expecting a decline of 175,000 jobs in October but weekly claims suggest a higher figure could be seen, where a 10% increase on the unemployment rate could hurt risk appetite and send equity indices to new monthly lows.

Other important data worth watching out for will be the ISM manufacturing index, pending home sales and construction spending all due on Monday. Tuesday brings Factory Orders and Vehicle Sales while Wednesday's releases will be on the ADP unemployment change, ISM Services and Crude Oil Inventories. Jobless claims are due on Thursday and Wholesale Inventories and Consumer Credit end the week's releases on Friday.

Pound recovery

The Pound recovered from the big drop last Friday after the disappointing release of UK's Q3 GDP data, becoming the second best performer behind the Yen, closing the week 0.7% higher against the dollar at 1.6443, and posting a five-week high against the Euro.

The drop in Q3 GDP to -0.4% has been widely questioned and there is a lot of speculation that the figure will be revised on the higher side on November 25 based on the PMI data. However, any weakness in October's PMI release could hurt the pound, and possibly send it to 1.6 levels.

Thursday will be a big day for the pound when BoE members gather for a meeting. There is no doubt that interest rates will remain at record lows of 0.5%, but the big question which all investors are asking is whether the Bank will increase the asset purchase programme or not.

There is a consensus among economists that the programme will be expanded, though they are evenly split whether the Bank will add GBP25bn or GBP50bn - that decision, if taken, will add more pressure on the pound.

Data releases from the UK are also important this coming week, starting with the home track housing survey and the PMI manufacturing index Monday. Wednesday brings nationwide consumer confidence and services PMI. Industrial production is due on Thursday along with minutes of the BoE meeting, while producer prices will end the week on Friday.

Euro slides

The Euro fell the most against the dollar in six months as the drop in equity markets reduced demand for higher yielding currencies. EUR/USD fell 2% last week to close at 1.4721.
This coming Thursday will be important for the Euro as ECB members are due to decide on monetary policy.

As it is for the FOMC and the BoE, rates are not expected to change and remain at 1%, but traders are looking forward to more hawkish statements from President Jean Claude Trichet. Last week ECB member Axel Weber suggested that it is time to start withdrawing stimulus from the markets. If President Trichet supported his suggestion, we could see a boost in the Euro towards 1.50-1.52 levels.

Eurozone economic calendar is a bit light in the week ahead. Monday kicks off with the Eurozone PMI manufacturing index, while Wednesday sees releases of PMI services index and Eurozone producer prices. Retail sales are due on Thursday and the week finally closes with German factory orders and French trade balance releases.