By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The dollar continued to find support during the Asia session after a slightly weaker than expected CPI report from Australia, and a newspaper article which said the FOMC would likely ease in “measured” fashion. EURUSD traded 1.3802-1.3878, USDJPY 81.32-81.76. Although the scope of any further Fed easing remains a significant unknown, consecutive days of decent US data have probably encouraged investors to scale back some short dollar positions. Comments by New York Fed President Dudley overnight may also have helped. While he supports further easing, he said, “I would put very little weight on what is priced in or not priced into the market&We make our decision on the way we think is the best way to achieve our mandate.” US equities closed flat while Treasury yields picked up, likely due to moderating expectations for further QE. The Conference Board consumer confidence index rose more than expected to 50.2 though there was some deterioration in the current assessment of the labor market. The S&P/Case Shiller home price index fell 0.3% m/m in August as prices have turned from rising in Q2 to falling in Q3 following the expiration of homebuyer tax credits. We maintain our view that the dollar could benefit from too much QE being priced in ahead of Nov 3. Durable goods and new home sales are due.
EUR
The euro was weaker on the broader dollar rally, despite claims by ECB Governing Council Member Quaden that the euro’s current value is not out of line with economic fundamentals. ECB Governing Council Member Weber said that Germany’s recovery is not yet fully self-sustaining.
The Irish government announced a target of EUR15 bn in budget savings over four years, almost double the figure announced in the December 2009 Stability Programme update but in line with a recent estimate by a government-sponsored think-tank. Details should be in the 4-year fiscal plan, which is scheduled for mid-November.
GBP
MPC Member Posen has reaffirmed his dovish stance, saying that overshooting the inflation target by a little over a percentage point does not mean inflation is high, and that looking at short-term data can miss the point.
UK preliminary Q3 GDP was reported +2.8% y/y, vs consensus for +2.4% and the Q2 reading of +1.7%. The improvement was largely driven by construction and the y/y figure was the highest since Q3 2007. The service sector’s contribution to growth remained limited. The better GDP and S&P’s decision to change the UK ratings outlook to stable from negative and affirm the AAA rating helped sterling gain versus the euro while cable came back down on the back of the broader dollar move.
Although the latest data decreases QE expectations, we stay cautious on sterling as recently announced spending cuts will likely weigh on domestic growth.
AUD
The AUD fell heavily after Q3 CPI missed expectations. The headline reading came in just short at +0.7% q/q (cons. +0.8%, prev. +0.6%). The core reading also missed, rising only +0.6% q/q (cons. +0.7%, prev. +0.5%). Consequently, our Australia economics team no longer expect the RBA will raise the cash rate next week. Instead, they now think the next 25bp hike will come in Feb. 2011.
TECHNICAL OUTLOOK
USDCHF 1.0329 next resistance.
EURUSD BULLISH Look for a break above 1.4159 for resumption of the bull trend. Support at 1.3637/1.3559 zone
USDJPY BEARISH While resistance at 82.52 holds, expect decline towards 79.75 with scope for 77.91 next.
GBPUSD BULLISH Recovery has scope for 1.6107. Support holds at 1.5606
USDCHF BEARISH Rise through 0.9918 breakout low exposes 1.0329. Support holds at 0.9463 ahead of 0.9225.
AUDUSD BULLISH Move above 1.0004 would expose 1.0166. Support defined at 0.9662 ahead of 0.9542 reaction low
USDCAD BEARISH As long as 1.0380 continues to cap the upside, expect decline towards 0.9981 and 0.9820 next.
EURCHF BULLISH Violation of 1.3665 leaves next resistance at 1.3924. Near-term support at 1.3456 ahead of 1.3265
EURGBP BULLISH Sudden decline through 0.8773 exposes 0.8689 and 0.8636 next. Resistance at 0.8885 yesterday’s high
EURJPY BULLISH Need a break below 111.56 to trigger bear trend. Upside capped at 115.68.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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