More questions than answers

Euro
The euro commenced the week on a strong footing deriving support from expectations of soft US data, due to be released later in the week. US producer prices released at the closure of the previous week continued to pressure the greenback as investors braced themselves for a slew of data likely to shed more light on the path of US interest rates.

US retail sales came in showing a drop of 0.3 pct from a month earlier, whilst the release of the current account deficit which skyrocketed to a record $ 166 Billion during the second quarter added intense pressure on the currency. The euro surged, but was held below $ 1.2300, as markets pondered on the effects of a widening current account on the long-term prospects of the US economy.

The retail sales number excluding the volatile transport sector was up 0.2 pct, providing some solace to dollar bulls betting on a speedy recovery in the US economy. As the week progressed, the dollar displayed some muscle as it regained some of its early losses thanks to a healthy manufacturing report from New York.

The NY Fed's Empire State manufacturing index rose to 28.3 in September, and was much higher than the number of 18.8 forecast in a Reuters survey, whilst US industrial production also recorded a lesser-than-expected 0.1 pct rise, hinting that the manufacturing sector was in a recovery phase.

Meanwhile, expectations that the Federal Reserve would continue with their measured pace of monetary tightening also helped the dollar, as investors speculated on the possibility of further rate hikes following the September 21 meeting. The market widely believes that a 25 basis point hike is a mere formality at the meeting next week.

However, the dollar was forced to hit the brakes once again, as the Philly Fed's index of manufacturing activity in the US mid-Atlantic region took a nose-dive; falling to 13.4 in September, from 28.5 in August, at odds with market expectations of a fall to 24.5. The news followed the release of US consumer prices, which rose a meagre 0.1 pct, suggesting that there was little need for the Fed to raise rates hastily.

The greenback gave up some of its gains in the aftermath, but stuck to recent ranges refusing to budge after a lower reading in the University of Michigan's consumer sentiment index for September. The Fed statement that follows the rate decision is likely to be paramount importance and will be scrutinised closely for further clues on the future of US interest rates.

Range for the week: $1.2060 - $1.2360.

Japanese Yen
The Japanese yen was engaged in high volatile range trading during the past week, as all eyes remained focussed on the release of key US data, which presented mixed signals of the world's largest economy.

The Japanese yen, which commenced the week on a strong note, failed to extend its gains as the dollar continued to receive support from expectations that interest rates in the United States were on their way higher.

News that Japanese industrial production remained flat in July from a month earlier also pressured the yen, but the currency held on following the release of lack-lustre US data that intensified the debate on how fast interest rates in the US ought to rise.

The week ended in much the same fashion it started for the Japanese yen, as the currency continued to trade in ranges following the markets inability to take a firm view due to the upcoming US Fed policy meeting. The release of Japanese import and export data will be in focus next week, although it is likely to be pushed to the sidelines by the Fed who meets later in the week.

Range for the week: 108.00 - 111.00

Sterling
Sterling kicked off in an aggressive manner as data showed that core output prices for British manufacturers rose at their fastest pace in nine years.

The price data showed that soaring commodity costs were pushing up inflation pressures and prompted investors to question the current assumption that British interest rates were near their peak. Separate data also showed that British house price inflation accelerated to 14.3 in July, showing that the property market still had plenty of momentum in early summer.

As the week progressed, data showed that consumer prices in Britain rose by 0.3 in August, bringing the annual rate down to 1.3 pct, the lowest since April. The data reinforced earlier indications that the Bank of England's rate hikes were finally showing results as analysts scaled back their expectations for further interest rate hikes in the United Kingdom.

A report showing a slowdown in wage growth also pressured the currency lower as it added to the recent patch of soft data, indicating a slow down in the country's economy. Comments by Stephen Nickell, a member of the Bank of England's rate setting committee, who stated that interest rates might not have to rise much further if data remains weak, also took its toll on the currency.

However, a stronger-than-expected reading on the UK retail sales number, which climbed an impressive 0.6 pct in August bringing the year on year gain to 6.5 pct, restored the pond's pride and helped it end the week on a respectable note.

Range for the week: $1.7780 - 1.8080.