US Dollar Hits Four Week Lows - More to Come? (page 1 of 2)

US Dollar

The bad news for US continues to pour in as growth in the third quarter was reported to have been the weakest since March 2003. Even if inflation is still really a problem, economic growth is a bigger one. Over the past few weeks, any good news on the US economy was concealed in the details of the data reports.

This week, it was good news that concealed weakness and the bad news that was unarguably bad. This was the case with the GDP report which not only had a disappointing headline print, but also reported a drop in the price index and core PCE. The lower inflation readings validate the Fed's decision to avoid notching up their concerns about inflation earlier this week and keeps intact speculation for a rate cut early next year.

With growth expected to slow in the fourth quarter, the 1.6 percent acceleration in economic activity the last quarter indicates that the economy has not done as well as the market may have anticipated. Therefore even though the University of Michigan consumer confidence survey was revised higher for the month of August, the dollar shrugged off the report as it still remains a question whether this happiness will extend to big ticket purchases. Judging from yesterday's durable goods orders, this is unlikely as we look forward to more difficult times ahead for the US economy. After 3 days of powerful gains, we caution that the EUR/USD move is looking exhausted.

A pullback is possible, but for the most part, the currency pair should hold above 1.2600. The economic calendar next week is just as busy as the past week with Consumer confidence, Chicago PMI, ISM and non-farm payrolls due for release. For the most part, the market is expecting stronger numbers, particularly in confidence and payrolls. Although this may be possible, the economy is more likely to show further weakness than strength.

Euro and Swiss Franc

Stronger inflation numbers (M3) continue to support the case for another interest rate hike by the European Central bank this year. There is only a tiny chance that this hike could come at next week's monetary policy meeting, but previous comments from ECB officials suggest that the central bank may be looking to deliver the hike in December instead of November.

Although the EUR/USD staged a strong rally today, the true newsmaker was EUR/JPY, which managed to hit an all time high late last night. The gains have since been all reversed and then some which signifies that 150 is truly a problem level for EUR/JPY. Like the US, there are a ton of important economic releases due out next week including French and German unemployment, German and Eurozone retail sales, Eurozone consumer confidence, along with manufacturing sentiment indices for region as a whole.

Meanwhile even though Switzerland reported a larger drop in the KoF leading indicator report, the Franc rallied against both the Euro and US dollar. The reading was actually the weakest in 6 months, but the central bank's prior optimism as well as the government's concern for further losses in the value of the Swiss franc against the Euro outweighed the weaker KoF report. Next week, we are expecting the country's manufacturing PMI report and CPI. Both are actually expected to print stronger, which could extend the Franc's recent strength.

British Pound

Momentum continues to be on the side of the British pound as the currency charges higher despite the lack of economic data. The only two pieces of noteworthy news were pound positive acquisition flow and speculation by a UK think tank that the Bank of England may actually opt for a 50bp over a 25bp rate hike.